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Operator: Greetings. Welcome to the SideChannel SDCH Fiscal Year 2025 Q4 Financial Results Update Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Brian Haugli, Chief Executive Officer. You may begin. Brian Haugli: Thank you, John. It's good to be back. Thank you, everyone, for joining us today. My name is Brian Haugli. I'm the President and CEO of SideChannel, Inc., and thank you for your continued support of SideChannel. We truly appreciate your confidence in our long-term vision and strategy. Fiscal 2025 was a year of disciplined focus and strategic investment for SideChannel. While revenue remained relatively flat at approximately $7.4 million, we maintained a strong gross margin near 48% and held operating expenses in check. Most importantly, we used this year to make deliberate investments that position us for meaningful expansion in 2026, particularly around Enclave. Our mission has always been clear, to simplify cybersecurity while helping organizations meaningfully reduce risk. That mission continues to guide every operational and strategic decision we make. A little bit about Enclave, the center of our 2026 growth strategy. Enclave remains the cornerstone of that long-term growth strategy. During fiscal 2025, we made significant progress strengthening the platform, refining product market fit and expanding our pipeline across commercial and government sectors. As we move into 2026, our focus shifts decisively from foundation building to scaling adoption. We see demand accelerating for 3 areas, zero trust segmentation, secure remote access without VPN dependency, and three, protection of high-value assets across hybrid and OT or operational technology environments. Enclave is well positioned to meet this demand. We believe 2026 will be a breakout year for Enclave revenue growth, driven by stronger channel execution, direct enterprise sales and increased awareness of microsegmentation as a practical zero trust control. To execute this expansion, we've made 2 critical leadership hires that significantly enhance our go-to-market capabilities. First, I'm excited to welcome Jamie Wolf as our new Chief Marketing Officer. Jamie brings deep experience in building high-performance revenue marketing engines for SaaS and security companies. Her focus is on sharpening our brand narrative, accelerating pipeline creation for Enclave and ensuring SideChannel as a consistent, high-impact voice in the market. You will see the impact of this hire throughout 2026 in the demand generation, partner marketing and overall market visibility. Secondly, we welcomed Rick Dill as our enterprise Account Executive dedicated to Enclave. Rick brings over 2 decades of IT and cybersecurity sales leadership, including proven success in scaling enterprise zero trust and network security solutions. His role is laser-focused on accelerating large Enclave deployments in the enterprise and mid-market. Since joining, Rick has already strengthened our enterprise pipeline and sharpened our sales execution. These hires represent a shift from infrastructure building to revenue acceleration. And we continue to operate with strong financial discipline. Obviously, I'm joined today by Ryan Polk, our CFO, and our focus remains on improving revenue quality and retention, expanding higher-margin Enclave deployments, scaling efficiently through channel partners and strategic alliances and tight alignment between sales, marketing and product. We're intentionally balancing growth with fiscal responsibility. Every investment we make is measured against long-term shareholder value. Looking ahead, we enter fiscal 2026 with a stronger commercial and government Enclave pipeline, an expanded leadership team fully aligned to growth execution, a refined go-to-market strategy centered on zero trust, microsegmentation and vCISO-led cybersecurity programs and a growing demand for practical alternatives to legacy perimeter security. We believe SideChannel is exceptionally well positioned to benefit from the industry-wide shift towards zero trust and operationally practical cybersecurity. Enclave is no longer an emerging product inside the company. It is a primary growth engine. In closing, I want to emphasize this. Fiscal 2025 was a year of strategic positioning. Fiscal 2026 is a year of execution and expansion. We are confident in our market opportunity, our leadership team, our technology and our ability to deliver increasing value for our customers and our shareholders. Thank you again for your continued trust in SideChannel. We look forward to updating you as we execute on our growth strategy in the year ahead. With that, we can go to any Q&A, John, that you see online. Operator: [Operator Instructions] And we do have a question coming from the phone lines from [ Luke Wheatley ], private investor. Unknown Attendee: Brian, with those warrants set to expire in early 2026, do you all have any plans with raising capital, raising any debt after those expire? Brian Haugli: Luke, great to hear from you again. Good to see that you're still following us. I appreciate that. Right now, we are just -- really just kind of looking at April as a milestone and adjusting really after that. Right now, I'll tell you, there have been no discussions or plans for raising any capital or taking on any debt. We're still very happy of our balance sheet structure, maintaining zero debt, and I don't think we're in a position or want to take on debt as a line to get any type of funding into the company. Same thing, I don't think we're looking at an equity raise either at this moment. But I will say just depending on kind of how things go in Q2, well, Q1 that we're in right now and Q2, that's going to feed into whether or not we determine if we want to do that. But like I said, nothing would happen before April, May of next year when those warrants expire as you stated. Unknown Attendee: Got it. And then one more question. I think just looking at the history of your business, what we've seen since the Enclave growth strategy has been put in place, we've seen the vCISO revenue kind of go down as much as the Enclave has gone up. And in the press release today, there was no real discernment between what percentage was vCISO revenue versus Enclave. Could you give us a little indication of what percentage of revenue in Q4 was vCISO versus Enclave revenue? Brian Haugli: Yes, Ryan, can you cover again on that? Ryan Polk: Yes, happy to do that. Luke, we don't -- we didn't disclose and haven't disclosed revenue by quarter and by category. And of course, as we prepared for our annual filing that we'll make in a couple of weeks here in the Form 10-K, there won't be a Q4 results in there. So I can't give you those specific numbers in this call. We won't be disclosing that information. But I think we did give some overall I think for the year in our Form 10-K, which will come out in a couple of weeks, you'll see information about the performance of the vCISO category versus the rest of our categories, and there'll be some more commentary in that document. So if you could hold on for a couple of weeks, you'll be able to read some of that. You'll be able to read the answer to your question in the MD&A. Operator: [Operator Instructions] Ryan Polk: John, we did get one question submitted to us via e-mail. Could I read that now, please? Operator: Absolutely. Ryan Polk: So Brian, I think this is a question that you will address. It's the -- the question is, will Enclave possibly have any application for air, water or land drones? Brian Haugli: Yes. So great question, something that Nick and I, our CTO, have discussed and gone after. Those drones are what you would consider operational technology or IoT, right, Internet of Things, small form factor, low power consumption, like low or no communications capabilities, right? So limited comms. Enclave plays very well here for a number of reasons. And I'm thinking predominantly from a military or DoD -- U.S. DoD standpoint, first and foremost. I'm sure there are the commercial side as well. But I think when Nick and I think about Enclave applicability, it's with the U.S. federal government and the DoD first. So yes, there is applicability there. Enclave can be deployed to these types of devices, whether it has an operating system -- standard operating system like Windows, Linux or Mac or a firmware-based operating type system like a BLC or something that like a drone might be running on. We have different ways to deploy Enclave for that. And yes, there definitely is applicability. I think the DoD customers that we've been -- we're already currently working with, that's not their focus right now. They're predominantly focused in large-scale networks research and defense weapon systems. If they want to bridge that to drones, that's great. We would -- we can definitely accommodate. But from a commercial standpoint, I think that's a growing area. Obviously, General Brown, who is on our Board, a lot of insight from the U.S. Army as he's retired from, but also in AUSA where we've gone to those conferences and seen these commercial drone systems trying to be sold into the DoD or the defense industrial base. So the applicability is there. I think it's interesting to see the adoption by the U.S. government. I think there's a lot that we've heard and learned about where the adoption is on that by the DoD versus maybe what most people think. So we're excited if we can get into that space. We're going through federal sales partners to sell into the federal government right now. It's not something we're going with direct, which is not a bad thing. It just actually cuts down on our costs on having a sales structure and gives us a wider and broader sales approach by going through partners who know that space a little bit more intimately. So yes, I think 2026 will show whether or not that area is being adopted by and large. And then where we can fit in, we will definitely go after that. Any other questions on online? Ryan Polk: John, there's no questions on the webcast. Operator: We have no questions from the phone lines as well. Brian Haugli: Okay. Well, let me just summarize. There's a couple of questions that we've seen from the Boards. Hey, everybody, good to -- I read everything you said. I haven't been on in a while, but good to kind of see. I'm just going to kind of summarize, I guess, a couple of them. I think there's some themes. So one of them, I guess, kind of summarize how critical is Enclave to the future growth compared to vCISO services, kind of the differentiation between our vCISO services group and our Enclave product group. My answer is Enclave is absolutely central to our long-term strategy. Our vCISO and advisory services remain important demand drivers and trusted entry points, but Enclave is our primary growth engine for scale, margin expansion and enterprise penetration. Our services businesses often open the door to Enclave adoption and Enclave deployments in turn, deepen long-term customer relationships. This integrated model is proving to be a strong competitive advantage for us. So that's just kind of one summary question. I think if I summarized another one, excuse me, let me go down here through the questions that were asked. Biggest risk kind of going into FY 2026. I had standing one-on-ones with my leadership team on a weekly basis and today, talking with our COO, Matt Klein, what we're seeing in the market budgets with across customer bases, small, midsize and enterprise. A lot of businesses are honestly trying to figure out how to just manage in this climate. And in the United States, a lot of businesses we're seeing are trying to figure out how to manage within this administration. With 1 year kind of under everybody's belt, it seems like everyone's figured that out, and we are seeing a change for folks to better adopt outsourced services. It's funny on our services side, we do better with tighter budgets and when layoffs are happening. We're called in for that because lower cost alternative to full-time hires on the services. Our product, Enclave also multifaceted, multi-module, so it can do multiple different things that multiple tools would do. We can do inside of one platform. So there's some competitive advantages to what we're doing when the markets change. And then obviously, our ability to hold on to those clients through market upswings because of the value that we're bringing, our diversity in our approach with services. You'll see what we're doing with insider threat, what we've done with cloud security, obviously, bringing on and deploying more things with Enclave as a product being kind of multifaceted. So it's just -- it's interesting that the market forces and what we're seeing taking shape our visibility into those. But really, what's the biggest risk going into FY 2026? Our biggest risk is execution velocity, ensuring that increased market interest converts into closed revenue at scale. That's precisely why we invested in leadership across marketing and enterprise sales. The demand is real and execution is now the primary focus. So that's how we're looking to address that big risk going into 2026. I think that's kind of the big ones, if I summarized a number of the questions that came from folks. Yes, it looks like it's kind of going through a real quick high level. So yes, we're looking forward to releasing the 10-K and closing out the year. And then obviously, we're already in Q1. So we're excited to close out Q1 and kick into Q2 and calendar year 2026 and just keep moving along. So thank you, everybody, for being on the line and following the SideChannel story overall. And like I said any other time, feel free to reach out. You can hit us via our Investor Relations page on SideChannel. Feel free to e-mail us questions or comments, and we look forward to speaking with you at our next call. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings. Welcome to the Dollar Tree, Inc. Q3 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to Robert LaFleur, Senior VP of Investor Relations. Thank you. You may begin. Robert LaFleur: Good morning, and thank you for joining us to discuss Dollar Tree, Inc.'s third quarter fiscal 2025 results. With me today are Dollar Tree, Inc.'s CEO, Michael Creedon, and CFO, Stewart Glendinning. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans, and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the Risk Factors, Business, and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our Annual Report on Form 10-Ks filed on March 26, 2025, our most recent press release, and Form 8-Ks and other filings with the SEC. We caution against any reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all discussions today refer to our results from continuing operations, and all comparisons discussed today are for 2025 against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Michael and Stewart will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to one question. I'd now like to turn the call over to Michael. Michael Creedon: Thanks, Bob. Good morning, everyone, and thank you for joining us to discuss our third quarter results. It's great to be with you again. When we recently gathered in New York for Investor Day, I said this was the start of a new era for Dollar Tree, Inc. One company, one brand, one focus. Our energy is now directed towards strengthening and growing the Dollar Tree, Inc. business. We delivered a high-quality quarter accompanied by mid-single-digit comps, above outlook earnings, and strong end-of-quarter momentum heading into the holidays. These results speak to our disciplined execution and focused strategy. Let me start by framing the quarter at a high level, then Stewart will take you through the financial details. First, I'd like to highlight the strength of our discretionary business, which showed its first positive year-over-year mix shift since 2022. We believe this strength illustrates how our exceptional value proposition, including our growing multi-price assortment, is resonating with our shoppers by helping them meet their needs and desires in the budget-constrained environment that many consumers find themselves in today. The three pillars that define Dollar Tree, Inc. are value, convenience, and discovery. Those are not slogans. They're how we win. They describe a brand that offers customers compelling values across a variety of price points that help them do more with less, in stores that are easy to shop and full of surprises worth discovering. While the consumer landscape remains uneven, the underlying story remains consistent. All consumers are seeking value. Marrying that value-seeking behavior with convenience and discovery is the intersection where Dollar Tree, Inc. thrives. And the evidence is clear. Dollar Tree, Inc. continues to gain share and attract new shoppers while continuing to serve its large and loyal base of core customers. Today, we serve an increasingly broad spectrum of shoppers, from core value-focused households to middle and higher-income shoppers who are making deliberate choices about how and where they spend. We had 3 million more households shop with us in Q3 this year compared to Q3 last year. Approximately 60% of these incremental shoppers came from higher-income households, those earning over $100,000, and 30% from middle-income households, those earning between $60,000 to $100,000, with the rest from lower-income households, those earning under $60,000. Importantly, Q3 spending growth was broad-based across all income sub-cohorts, including households earning below $20,000. To us, this demonstrates that Dollar Tree, Inc. isn't just for tough times or for those with limited resources. Dollar Tree, Inc. is for smart shoppers across all income brackets where value, convenience, and discovery matter. At the same time, higher-income households are trading into Dollar Tree, Inc., and lower-income households are depending on us more than ever. For example, the average spend for lower-income households grew more than twice as fast in the third quarter as the average spend for higher-income households. While part of this reflects the fact that higher-income households are typically earlier in their customer lifecycle with us, the data clearly shows that our core customer remains loyal and deeply engaged. She's balancing her household budget carefully and continues to count on Dollar Tree, Inc. for essentials and increasingly for the seasonal and discretionary items that bring joy to her and her family. Over time, our goal is to inspire the same level of loyalty in our newer higher-income customers that we see in our core customers. While the average per household spend for our higher-income customers is currently lower, even given their higher income, larger average basket size, and ability to spend more, this is a simple function of trip frequency. Because many of our higher-income customers are still early in their relationship with Dollar Tree, Inc., their purchase frequency has significant room to grow. Over time, we believe that growing trip frequency among these higher-income customers, given their propensity to build bigger baskets, will be a powerful growth driver for Dollar Tree, Inc. This is why our brand promise matters so much right now. We make it easier for customers to do more with less, without trading down on quality or experience. And that is what keeps our traffic and baskets healthy in a cautious consumer environment. And with that, let's take a look at some of our Q3 highlights. Comparable sales increased 4.2%, a nice acceleration from the quarter-to-date trend of 3.8% we shared in mid-October. As the results suggest, October finished strong, driven by momentum in our multi-price assortment and a great Halloween. Our Q3 comp was all ticket-driven, as traffic was slightly negative. Discretionary mix improved 40 basis points to 50.5%. Comp increased 4.8% in discretionary and 3.5% in consumables. Gross margin performance exceeded expectations, reflecting strong operational execution and cost discipline. Adjusted EPS of $1.21 was nicely above our outlook, and Stewart will go through the drivers behind this upside in his remarks. We believe these results reflect our sharper focus and more disciplined execution. Multi-price was a key driver of our Q3 momentum. As a reminder, multi-price is a deliberate long-term data-driven strategy that began back in 2019 to make Dollar Tree, Inc. more relevant, flexible, and profitable. Multi-price is about evolving our assortment over time to include new, more relevant, and attractively valued items that we could not offer at a fixed price point of $1 or $1.25. Multi-price is one of the most important strategic shifts in Dollar Tree, Inc.'s modern history. And it's working. As we highlighted at our Investor Day, the roughly 5.5% annual comp we've averaged since breaking the dollar in 2022 is among the very best in all of retail. Those of you who attended our Investor Day may recall a slide from Stewart's presentation where he demonstrated how expanded multi-price penetration in categories like electronics, hardware, and Easter had a meaningfully positive impact on sales and per unit profitability. We've reproduced a similar analysis on our multi-price Halloween assortment this year, which we've included in our supplemental presentation available on our Investor Relations website. Our Halloween performance this year is another clear example of the power of multi-price. This year, our Halloween assortment generated over $200 million in sales, an all-time record. But to see the full impact of multi-price, let's go back to Halloween 2022 when multi-price was still in its infancy. That year, multi-price represented about 3% of units sold, 10% of sales, and 7% of merchandise gross margin across our full Halloween assortment. Fast forward to 2025. On a 25% larger base of sales, where multi-price accounted for roughly a quarter of our total Halloween sales and merchandise gross margin, but only 8% of Halloween units sold. We are continually engineering incremental value and profitability drivers into our multi-price assortment. Across Halloween this year, each multi-price item that we sold generated 3.5 times more profit than each non-multi-price item we sold. This is a full turn higher than Halloween 2022. By combining this increase per unit profitability with a higher multi-price mix, we were able to generate approximately 25% more margin dollars from our Halloween assortment this year compared to 2022, while selling approximately 10% fewer units. And this is just the positive impact on merchandise margin. It doesn't take into consideration any labor or distribution cost savings that come from handling fewer units. Looking at it this way, multi-price is a powerful growth and profitability driver. It broadens our value proposition and relevance to our customers, allows us to compete more effectively, helps drive cost leverage, and sets the business up for long-term success. More importantly, we are just getting started. Multi-price is not a one-and-done proposition. We expect these dynamics to play out across every holiday and special occasion and strengthen as our multi-price penetration expands. Over time, our customers will let us know what the right multi-price mix ultimately is. But we're confident that it's meaningfully higher than where we are today. So let's take a look at some broader merchandising highlights from the quarter. Discretionary categories accelerated through the quarter, with standout performances in party and home decor. Consumables were steady, led by household cleaning, personal care, snacks, and cookies. Seasonal performance was strong, particularly towards the end of the quarter. We planned the inventory carefully, had strong in-store execution, and are pleased with our sell-through. Those wins are proof points for our merchandising strategy and ever-changing, more relevant assortment that drives trip completion and, more importantly, enhances profitability and margin performance. Today, with a wider assortment of multi-price merchandise and re-stickering largely complete, 85% of the items in our store are still priced at $2 or below. Offering a broad range of price points while staying firmly grounded in value preserves the integrity of the Dollar Tree, Inc. brand. We believe time, convenience, pack size, and quality are all part of our customers' value calculation. And so is an expanded range of products that address a wide range of shopping occasions. When a customer can fill a basket with snacks, cleaning supplies, home decor items, and seasonal products all at a great value, that's when the Dollar Tree, Inc. magic is on full display. Q3 results were also powered by strong execution in our stores, supply chain, and support functions. At Investor Day, Jossi Conrad spoke about our commitment to simplify work, elevate standards, and empower our people. In Q3, we saw measurable improvement in these key areas. On store standards, we've rolled out new tools and training that simplify store routines and improve accountability. The results are visible with cleaner aisles, stocked shelves, and faster checkouts, with more to come. On associate engagement, our Race to Gold initiative continues to gain traction. As we've increased our investment in training and career progression, we've seen continued improvement in turnover. In Supply Chain, the network is performing at a very high level. Service levels and in-stocks coming out of this year's peak season are among the highest we've seen, and our planned increases in distribution capacity over the next several years should allow us to unlock even greater operating efficiencies and distribution cost savings. In technology, we continue to modernize our back-office systems and upgrade store infrastructure. These investments are simplifying work and enabling smarter decision-making in merchandising and replenishment. All of this comes down to one thing: making it easier for our teams to deliver a consistently great experience for our customers. With the Family Dollar sale behind us, we are already seeing measurable improvements in our culture and performance. We are fully aligned behind one brand, one set of priorities, and one mission. With leadership and investment focus concentrated on growing Dollar Tree, Inc. Every decision across product, stores, technology, supply chain, and people is aligned to strengthening one business. That alignment brings speed and accountability. Teams test, learn, and scale faster. And we now measure progress across a single set of metrics directly tied to creating shareholder value. We are moving forward with purpose, clarity, and conviction guided by the five strategic priorities we laid out at our Investor Day. Surprise and delight our customer with an expanded, more relevant assortment, manage expenses with agility by controlling the cost of the goods we sell and managing our SG&A with discipline to drive operating leverage and profitability. Create a strong connection with our customers, with cost-effective, quick-return, data-driven marketing, open more stores and improve the condition of our fleet, and finally, improve the in-store experience for our customers by raising the bar on our store standards. At the foundation of these priorities are a fast, flexible, and efficient supply chain and disciplined financial management that focuses on high-return investments and smart capital allocation. And at the forefront of our success is our people. The more than 150,000 associates who show up every day to serve our customers, support their colleagues, and strengthen the communities where we operate. They are the reason we do what we do and the driving force behind every decision we make. As you heard me emphasize at Investor Day, we manage this business with a focus on what I call the say-do ratio. Making clear commitments and delivering on those commitments. This mindset builds trust and accountability across the organization, and we believe that maintaining alignment between what we say and what we do is how we deliver consistent performance over time. In summary, we are pleased with our Q3 results. We're building a stronger foundation for the future, and we're confident about the direction we're heading. With that, I'll turn it over to Stewart. Stewart Glendinning: Thanks, Mike, and good morning, everyone. Q3 comp sales increased 4.2% and adjusted EPS was $1.21. Both our comp performance and our adjusted EPS were ahead of the expectations we shared in mid-October. The 40 basis points of Q3 comp acceleration between October was driven by a late but strong performance in Halloween sales on the back of a deeper multi-price assortment and excellent execution across our stores. Dollar Tree, Inc.'s seasonal assortment and value resonated strongly with shoppers. Our EPS improvement versus expectations was largely driven by freight, higher discretionary sales mix, and SG&A. With that, let's go over the details of our third quarter results. Q3 net sales increased 9.4% to $4.7 billion. Consistent with our expectations, Q3 comp growth was primarily ticket-driven as traffic was slightly negative. Average ticket growth was supported by increased multi-price penetration, particularly across our Halloween assortment and the pricing actions we began rolling out last quarter. Importantly, strong execution around merchandise costs, tariff mitigation, freight, and operating expenses helped drive profitability. Q3 gross margin expanded 40 basis points to 35.8%. These results reflect the strength of our assortment and the agility of our merchandising, supply chain, and store operations teams. The key drivers of this improvement were merchandise margin, successful execution of our five merchant levers, renegotiation, reengineering, shifting country of origin, discontinuing, and targeted price changes. All contributed to our ability to manage increased costs from tariffs. Freight, import, and inbound freight rates were favorable versus prior year, with lower spot market utilization and better container flow through at our DCs. Domestic transportation costs were also favorable. Mix, discretionary, and seasonal categories, particularly Halloween, were stronger than expected, increasing the realized mark on. Markdowns, as part of the ongoing strategic initiative to increase shelf productivity that we outlined at Investor Day, we identified and wrote off various slow-turning SKUs. This will create room for more productive items and help optimize storage space utilization in our stores and DCs. The total impact to Q3 earnings was approximately $56 million or approximately $0.21 of EPS. We believe we will see increased sales and profits per store going forward as we bring in new items or reallocate shelf space to existing but faster-turning products. Shrink, overall, shrink was higher than last year but in line with our expectations. These drivers taken together drove the Q3 gross margin performance. At the Dollar Tree, Inc. segment level, our Q3 adjusted SG&A rate increased 160 basis points to 26.2%, driven by higher store payroll related to wage increases and re-stickering, general liability claims costs, and D&A from elevated store investments. These were partially offset by sales leverage. As a reminder, we do not expect costs related to re-stickering and other price-related activities to be repeated next year. Also, the wage-related payroll increases this year were expected and planned. Looking forward to next year, we expect wage growth to moderate. As we discussed at Investor Day, on a go-forward basis, our goal is to grow Dollar Tree, Inc. segment SG&A per store below the rate of inflation while reinvesting selectively in high-return initiatives that enhance the customer experience and the long-term profitability of our store base. We believe this will result in future SG&A cost leverage. Adjusted corporate SG&A should be considered net of TSA income because of the costs we carry in order to service the Family Dollar transition. Using this lens, our adjusted corporate SG&A rate net of the $24 million of TSA income leveraged 80 basis points to 2.4%. A positive step toward our goal of reducing corporate SG&A to 2% of sales by fiscal 2028. Adjusted operating income increased 4.1% to $345 million. Our operating margin contracted by 30 basis points to 7.3%, reflecting the offset between the gross margin expansion and SG&A deleverage, partially driven by cost headwinds such as re-stickering that will not repeat in 2026. Keep in mind our comments with respect to anticipated SG&A leverage next year, at both the Dollar Tree, Inc. segment and the corporate level. Net interest expense and our adjusted tax rate were broadly in line with expectations. Adjusted EPS from continuing operations increased 12% to $1.21. Moving on to the balance sheet and free cash flow. Inventory was down $143 million or 5% versus prior year while sales increased by 9.4%, our store count increased by 4.5%, and we ramped up our DCs in Ocala and Odessa. This reduction reflects our focused efforts to increase inventory turns and improve shelf productivity. We ended the quarter with $620 million of commercial paper notes outstanding, and $595 million in cash and cash equivalents. On the Q3 cash flow statement, we generated $319 million in cash from operating activities and had capital expenditures of $376 million. This resulted in negative free cash flow in the quarter of $57 million. Year to date, we generated $88 million of free cash flow. As a reminder, the fourth quarter is our highest cash-generating quarter because of normally high levels of sales and because our capital expenditures skew towards the first three quarters of the year. In Q3, we purchased 4.1 million shares for $399 million, including excise tax. Subsequent to quarter end, we repurchased an additional 1.7 million shares for $176 million. Year to date, we've completed $1.5 billion of share repurchases or approximately 16.7 million shares at an average price of $90 per share. This represents approximately 8% of the shares we had outstanding at the beginning of the year. Our liquidity remains healthy, our balance sheet remains flexible, and we have ample capacity to fund our growth and return significant capital to shareholders. Our capital allocation priorities remain unchanged. Number one, invest in growth. Number two, maintain a strong and flexible balance sheet. And number three, return capital to shareholders. Looking ahead, we expect Q4 comps will come in between 4-6%, which should support net sales of $5.4 billion to $5.5 billion and adjusted EPS in the range of $2.40 to $2.60. On a full-year basis, this would raise our comp outlook to between 5-5.5%, and our adjusted EPS outlook to $5.60 to $5.80. The underlying assumptions incorporated into our full-year outlook are as follows: net sales of approximately $19.35 to $19.45 billion, gross margin expansion of approximately 50 to 60 basis points, reflecting sustained favorability in merchandise margin, freight, and occupancy leverage with some offset from markdown and shrink. Dollar Tree, Inc. segment SG&A deleverage of approximately 120 basis points, primarily driven by higher store payroll related to wage increases in stickering and, to a lesser extent, facilities costs and D&A. Corporate SG&A costs, we expect corporate SG&A net of $55 million of 3% year over year. Net interest expense of approximately $85 million to $90 million, which is about $10 million to $15 million below our prior outlook. An effective tax rate of approximately 25%. Shares outstanding of approximately 206.4 million, reflecting our share repurchase activity through December 2. We remain on track to meet our full-year CapEx target of $1.2 billion to $1.3 billion. We understand that at this point, many of you are shifting your attention to next year. As is customary, we intend to give a detailed outlook for 2026 on our next earnings call in March. With that said, I will remind you of the directional outlook we provided at our Investor Day, where we outlined an algorithm for adjusted EPS to grow at a 12% to 15% CAGR through 2028, supported by underlying EPS growth of 8% to 10%, with the balance being driven by the unwind of certain discrete items mostly affecting 2026 with some residual carryover into 2027. To review the underlying details of the algorithm, I direct you to our Investor Day presentation, which is archived on our IR site. And we will give you more specifics and any updates next quarter. To wrap up, we're executing well against the roadmap we shared with you in mid-October. Each day, we continue to see tangible proof that the fundamental appeal of this business—value, convenience, and discovery—is resonating with customers and translating into strong financial results. With that, I'll turn things back over to Mike. Mike? Michael Creedon: Thanks, Stuart. Let me wrap up by putting Q3 in the broader context of where we are and where we're going. When we shared our roadmap at Investor Day, we said this transformation was about focus, consistency, and accountability. We believe Q3 was a strong proof point that our strategy is working. We delivered above-market comps, expanded gross margin, and continued to make meaningful cultural progress across the organization. Today, Dollar Tree, Inc. is a pure-play value retailer with the scale and focus to compete at the highest level. Post-Family Dollar, we have clarity of purpose, and our teams are responding with renewed intensity. As we look to Q4, the setup is solid. Halloween was great, and our Thanksgiving and Christmas assortments are resonating with our customers as we remain focused on consistently delivering unbeatable Wow value and the thrill of the hunt experience. As 2025 winds down, let me wrap up by saying first to our associates, thank you. Your dedication, creativity, and pride in the work you do are what makes Dollar Tree, Inc. special. To our customers, thank you for your trust and loyalty. For choosing us for the moments big and small that matter the most in your daily lives. And to our shareholders, thank you for your continued confidence and partnership. With that, Stuart and I are happy to take your questions. Operator: Thank you. We will now be conducting the question and answer session. One moment please for our first question. First question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question. Matthew Boss: Great, thanks and congrats on another nice quarter. Maybe I'll maybe two parts. Mike, could you elaborate on drivers of the same-store sales acceleration that you saw in October? Speak to comp trends that you've seen in November that support the 4% to 6% comp guide? And then Stewart, could you just help break down gross margin expansion opportunities in the fourth quarter? And how best to think about gross margin puts and takes maybe at a high level for next year? Michael Creedon: Yes. Sure, Matt. As we looked at how the quarter runs unfolded, the Halloween was just a great finish to the quarter. It did come as we see in times like this, people buying for need and a little closer to need. So it came a little later, but it came incredibly powerfully. And, it came with a record number. If you go back, Easter performed that way. A great Easter, a great Halloween. Our setup for Thanksgiving and Christmas is just fantastic. So we really look at what we've done with multi-price and how the assortment's gotten better and our customer across all incomes is really resonating with that. And providing just fantastic seasons for us. So we feel really good about our guide on the four to six. Stewart Glendinning: Matt, let me pick up on the gross margin for the fourth quarter and then just talk a little bit about next year. So first of all, as we think about the fourth quarter, the same kind of levers that you saw in the third quarter, we detailed some of that in our supplementary materials as well as in my prepared remarks, are going to be drivers in the fourth quarter. You will see a very powerful fourth quarter on the back of those drivers. If you look at next year and just think about next year, freight is a benefit certainly in that fourth quarter. It came through in the third quarter. As you look to next year, both freight and markdowns are the areas that we'll be watching. If you think about how we operate our business, we buy to a margin. And so when we set up our goal for next year, we shared with you that we said we would be equivalent to this year's margin plus or minus 50 basis points, and that's the place that we're targeting. There may be continued benefit in freight as we move into next year. There is some belief that perhaps on the freight side, we will see a tightening of capacity later in the year, and we are watching the potential shortage of drivers. Understand that the reason I bring up the targeted gross margin is because we use those five merchant need levers to achieve that margin. So I think the margin you can take to the bank for next year. The second piece is to refer back to the Investor Day materials that we had. And in our recent investor day, we shared with you an algorithm said we would achieve high teens improvement next year. That's on the basis of that same gross margin achievement and based on some of the discrete items that we're expecting to see in coming years. So we're set up well for next year. And I think that probably gives you the main drivers. Operator: Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question. Michael Lasser: Good morning. Thank you so much for taking my question. It's on traffic. And obviously, this was the first decline in traffic that Dollar Tree, Inc. has experienced in a while. To what degree is that as a result of some of the legacy households pushing back on the price increases that have been taken in the last couple of quarters? And if that's the case, does that give you any pause on your ability to achieve this high teens EPS growth next year in light of the prospect that you might have to make some investments in order to recapture those households that are just dissatisfied with the pricing changes? Thank you so much. Michael Creedon: Yes. Michael, we really see traffic as a mix between some internal activity, namely the re-stickering, and some broader retail trends. We don't see it as a pushback from our customer. And if you look at our performance in the quarter, we had great growth across all income cohorts. And our core customer really had our highest comp. So we look at it and say, we saw the traffic decelerate in that August, September time frame. That was the peak of our re-stickering. Those red stickers were the peak distraction for us. And then it was good to see traffic strengthen towards the end of the quarter really on the backs of that Halloween and that great strength in Halloween. So we believe there was some, you know, broad-based retail traffic deceleration around back to school, some of the sticker shock around back to school. But as we got into the real core of what Dollar Tree, Inc. does and does, we think, better than anyone, we saw the strength in our Halloween and we're very excited about what Thanksgiving and Christmas and all the seasons can do for us. Operator: Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Partners. Please proceed with your question. John Heinbockel: Mike, two quick ones. When you think about traffic or divergence between traffic and units, so you sort of is the idea traffic will be strong units, maybe to a lesser degree because you're basically trading people into higher price point items. Talk about that divergence in your mind. And then secondly, you know, if the units are gonna grow at a slower pace, how do you think about space allocation and replanagramming the stores, you know, over maybe the intermediate to longer term? Michael Creedon: First of all, thanks, Rob. We'll always follow our customer on that. We believe that the customer is resonating incredibly well with multi-price. We're hearing that in the surveys we're doing. We're seeing it in how our customers are performing in the store. And that real strength in the comp of that core customer. So, yes, when we look at the store, when we take multi-price, we'll take away sections of a dollar 25. And so your units will naturally decline there as you take that space and make that space more productive. So we do see some of that. But we believe, you know, the proof point we have from break the dollar was that you took up the price of the whole store. There were elements of the store that just didn't work, and our merchant team took the next buying cycles to really recover that. What we've seen here in this multi-price evolution and some of the re-stickering we did based on the inflationary cost environment is that the units have performed better. The traffic has performed better. And we're confident we can continue to drive that value in our product across these price points and continue to give the customer exactly what they need. So we see that coming together very well for us, and we'll respond to the customer and their trends with how we set up the store. Operator: Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question. Edward Kelly: Yes, hi, good morning. Thank you for taking my question. I wanted to ask you about the mix of multi-price as you think about next year. Just looking out, it does seem you'll have more conversions. I would imagine you're still doing more merchandising around that, improving the multi-price mix. So how do you think the stores look from the standpoint of the multi-price offering as we think about next year? And then how does that play into the way that you are thinking about driving comp next year in terms of traffic versus ticket? Thank you. Michael Creedon: Yes. Thanks, Ed. I mean, really want to start with saying 85% of the store is still $2 or less. So we're still early in this multi-price game. And when you look at what the seasons have done, we're gonna continue to benefit in those seasons from the multi-price assortment. And we're really looking at everyday essentials and where we can benefit in the assortment there and the shift towards multi-price. Where it ultimately goes, our customers will respond to us, and we'll respond to them in terms of building it out. But I know it's higher than where we are today, and it's something that we believe sets up a multi-year run where we're able to respond to our customers, wow them with new discovery, and not just at the season. But new discovery every day because multi-price contains something on a wow table for us or on an end cap. That shows them something they couldn't believe they could get at that price. Even though it's a price, you know, higher than $2. So we're delivering the everyday value with the majority of the stores still at that $2 or less. And we're wowing the customer in what we bring into the multi-price assortment. Operator: Thank you. Our next question comes from the line of Paul Lejuez with Citi. Proceed with your question. Paul Lejuez: Hey, thanks guys. Curious if you could talk about Thanksgiving weekend and what you saw from a traffic versus ticket perspective. It sounded like you saw a pickup in traffic around the Halloween period. Curious what you saw Thanksgiving week and weekend. And then that 85% number I think you're talking in terms of units, in terms of the percent of the store that's still $2 and below. What percent of sales would we should we think about being above that $2 level? And how does it split between discretionary and consumables? Thanks. Michael Creedon: Yeah, Paul. Let me clear up the first one. So first of all, it's sales dollars that are at the 85% of the stores, $2 or less. That is on sales dollars. As we look at how the quarter has started, I said in my prepared remarks, we're really pleased. We look at the strength of the seasons, the Thanksgiving setup for Christmas, what we've seen so far in Christmas. So we feel really good about the guide for the fourth quarter. You know, we've got one period in. And we're feeling really good about where we sit. Operator: Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question. Rupesh Parikh: Good morning and thanks for taking a question. I also have a two-part one. So just on the elasticity front, just curious on the categories you took pricing related tariff and price increases. Just curious how that played out. And then if we do get tariff relief, you know, how do you guys approach that, whether on those savings or letting it flow to the bottom line? Thank you. Michael Creedon: Yeah. Thanks, Rupesh. I mean, the elasticity has really, you know, it's coming as we've modeled it. It's very manageable. It's really offset by the mix we see in the multi-price. But most importantly, the value perception is intact. Our customers are responding across all income cohorts, core customers, new customers, the 60% of the new 3 million that have come in, making more than $100,000. So we believe that the elasticity is very manageable. Then I do think it's important to go back to that break the dollar moment. What we saw there, it's a proof point. You can go back and look. See what happened with traffic. And now our performance, we believe, and what we're seeing in our numbers is better than that. And gives us the confidence in the path we're on on this. You know, as for the tariffs, I know it's been a lot in the news. We have, I think, one of the very best global sourcing teams in the business. They are all over this. They've got great partners watching this. We'll see how it unfolds with the Supreme Court. And we'll take action from there. Operator: Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question. Zhihan Ma: Hi, this is Zach on for Simeon. Thanks for taking our questions. Just a couple from our end. Back to the traffic question, is there a way you could compare your frequent and most loyal customers to those who are more episodic and, you know, would you say there's a similar deceleration in traffic trends between both of those groups, or is there a gap in the trend? Michael Creedon: Yeah. When we break it down, we really look at more our sales across all those income cohorts. It's really important to us to make sure that as we know multi-price skews and attracts more towards higher income, that we are committed to the base of our business, which is that core customer, that customer that makes, you know, around $60,000 a year. And we were particularly pleased with how our comps performed at that core customer. They had our highest comps in that customer. And so we think that our customer, whether you're new to Dollar Tree, Inc. or you shop us, you know, several times a month, that you're finding what you need as you seek if you seek out affordability, you're finding exactly what you need at Dollar Tree, Inc. Operator: Thank you. Our next question comes from the line of Scot Ciccarelli with Truist. Proceed with your question. Scot Ciccarelli: Good morning, guys. Scott Ciccarelli. I think we all understand that there was some internal disruption as you re-stick our product. But with the negative traffic this quarter and the expectation to keep expanding MPP, should we just expect 4Q and next year to have a similar mix of traffic and ticket that we saw in 3Q? In other words, it's prime all the comp is primarily driven by ticket. Thanks. Michael Creedon: Yes. Scott, it's hard to say. We can go back and we know what we saw in Break the Dollar. You saw the multiple quarters in the traffic performed there. We believe this time around, we were much more strategic. I mean, back then, the only choice was raising everything to a dollar 25. And as I've mentioned, you had a healthy percentage of the store that just didn't work at that new level, and the merchant team had to go over several buying cycles and reengineer products and renegotiate and get product that did work. And you saw what happened with traffic recovery. This time, we were much more strategic in how we took that. We really feel that we have found the right value places to take price, and our customers responded. If you look at value we took in Halloween or in Christmas, I mean, our customers responded incredibly well to that move. So I look at it and say, I think we were more strategic this time, or we at least had a more strategic opportunity available to us this time, and we'll see how the traffic plays out. Stewart Glendinning: Yeah. And maybe one other thing just to supplement. I think if you want if you go back to the investor materials we laid out, I mean, that entire strategy is set up to drive higher sales in stores. Via productivity on the shelves, via the way we intend to market to customers. And based on the way we intend to run better stores. I think that entire setup really is organized to enhance the traffic and the ticket flow. Operator: Thank you. Our next question comes from the line of Michael with Evercore. Please proceed with your question. Michael, could you please check if you're self-muted? Michael Montani: Yes. Hi, good morning. Thanks for taking the question. Was going to ask if you could share what the average selling price was in 3Q versus the time a year ago, and then curious if you think that you'd be able to get that level of price increase again in 2026 to drive comp? Michael Creedon: Yes. Our AUR right now is right about 50. When you look at that, value over time, it's pretty remarkable. Considering, you know, what this company's done, what other prices have done. So we look at it and say, our customer is gonna tell us with their comps, with their wallets, that we're hitting the right points in terms of value, convenience, and discovery. One of the things that we really turn to is that expanded more relevant assortment. So, yes, it comes at a higher ticket, but it's still an incredible wow for the customer. It fits their occasion, the purpose for their trip. And whether it's a great pack size for them that helps them. Or just an item that helps them celebrate, and they love it. So we feel that while the AUR moves up, it does so lock squarely into that value play for the customer. Stewart Glendinning: Keep in mind, one other item is that obviously, as our multi-price penetration increases, so that will also move AUR. That is not price dependent. And I think if you looked at the supplementary materials and you look at how well the multi-price worked in Halloween this year, it will give you a sense for the kinds of benefit we might see going forward as we drive that multi-price harder. Operator: Thank you. Our next question comes from the line of Zhihan Ma with Bernstein. Please proceed with your question. Zhihan Ma: Great. Thank you. Just one quick clarification on corporate expenses. Did it come in a bit better than your prior expectations? If you can provide a bit more color there, that'll be really helpful. And then a quick one on next year. Given the trade-in you have seen from middle to higher-income consumers, what does the tax refunds, the incremental refund next year do to middle to high-income consumers' shopping behaviors in your mind? Thank you. Stewart Glendinning: Yes. I'll pick up on the first part, Stuart here. The SG&A did come in better than we expected. As we get ready to set ourselves up for next year and achieve some of the aggressive savings targets we've set up. We've been squeezing down on SG&A. Some of those savings came in a little bit faster than we had expected. Michael Creedon: Yeah. And then I'll take the second one. I look at the tax refunds of the OB3, big beautiful bill. You know, would you offer the best value in retail? You benefit when people have more money in their wallet. And Dollar Tree, Inc. has the best value retail has. And we think we'll benefit as they get more money in their pocket. Operator: Thank you. Next question comes from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question. Kelly Bania: Good morning. Thanks for taking our questions. Wanted to ask about the consumables, the market share trends there from a unit perspective. They seemed quite strong in the first half but really shifted in the third quarter here. I was just curious if you had any explanation of what you think is happening there. Is that attributable to the sticker, the re-stickering, impact or any other color on the market share trends there? Michael Creedon: Yeah. Kelly, you know, the red dots is kinda how I'll answer that. It really peaked for us. In this Q3. It was the mass distraction. I will tell you, though, as we've seen trends from our customer post that, you know, we track via customer surveys, scrapes of websites and, you know, star ratings and all that. The sentiment of our customer that really peaked negative in that August, September has improved every week. So the fewer mentions of pricing, more positivity, less negativity, we've been watching that. And every week, that's gotten better. So, you know, we don't love that we had to create that environment for our customer. It was a necessary evil to continue to deliver for them and give them product at a value. But, you know, it is what it is, and it's behind us now. The red stickering is basically done. You get a little bit as you take some pack away. It's basically done. The distractions behind us, and our stores and customers are responding very favorably. Operator: Thank you. Our next question comes from the line of Joseph Feldman with Telsey Advisory Group. Please proceed with your question. Joseph Feldman: Thanks for taking the question, guys. When you talked about that higher-income consumer, to get them to visit more often with more frequency, I'm just wondering how you guys plan to go about that. Maybe is it more stimulus from a marketing standpoint? Or I don't know what other methods that you might be thinking of, but how do you get them to come more frequently? Thanks. Michael Creedon: Yeah. We love that this customer's finding us. We wanna create a very sticky relationship with them. We believe it is the more relevant assortment, so continuing to wow them each season that they come up and for their everyday essentials with items they just can't believe they found. Remember, you don't come into Dollar Tree, Inc. with a list and your head down, and I have to get this. You come in with your head moving around, looking at all the things that are wowing you. So that relevant assortment creates a sticky relationship, and then there is nothing more important than running better stores. Our store standards are on the move up. And we believe that as we continue to improve the in-store experience, those customers are gonna wanna come more and more often. Operator: Thank you. Our next question comes from the line of Robert Ohmes with Bank of America. Please proceed with your question. Robert Ohmes: Hey, thanks for taking my question. Wanted to follow-up on the last question. Just it's impressive how you guys are gaining all the new customers and the info you gave us on that. Just help me understand gaining all these new customers at all these income cohorts versus negative traffic? Like, how does that happen? Is somebody are there cohorts dropping out or coming a lot less frequently and that's offsetting all these new customers that you guys have gotten to come to the stores? Maybe a little more color on, like, what's happening there? Michael Creedon: Yeah. Robbie, it's really a question of frequency. So you're driving new customers to the store, which is I mean, 3 million new households. Yes. They're skewing a bit higher income. But the strength of our business is still in that core customer, their purchase frequency, their, you know, comp dollars. We believe that these new customers come in. We can increase their trip frequency too. When they find better-run stores and they find an assortment that keeps them coming back. So right now, they're coming in, you know, because of a Halloween or they're coming in for a great season. And then what they find in the store when they're there in health and beauty and in everyday essentials. That's what keeps them coming back. If you look at Dollar Tree, Inc., compared to some of the folks we aspire to be, the difference is not in our ticket. The difference is in trip frequency. We believe we've got an opportunity to unlock increased trip frequency with these great newer trade-in customers. Operator: Thank you. Our next question comes from the line of Bobby Griffin with Raymond James. Please proceed with your question. Bobby Griffin: Hey, good morning guys. Thanks for taking the question. Just curious if you could expand a little bit more on shrink and where you are in that journey of bending that line item. And then I don't think it was discussed at the Investor Day, but what is embedded in the multi-year outlook for shrink? Is that elevated rate first pre-COVID or is it a return to 2019 rates? Michael Creedon: Yes. I'll start with that, with the focus we have. You know, we learned a lot about shrink from Family Dollar. Family Dollar has, you know, a higher shrink threshold, if you will. And we were able to bend the curve over there. And so we've really reorganized how we're addressing shrink at Dollar Tree, Inc. It's not as simple for us as it is other we can't just go rip out a bunch of self-checkouts and improve our shrink. We don't have self-checkout, in any large capacity. So for us, it has to be leveraging training of our people, leveraging technology to address shrink over time. And then in terms of how it builds, Stuart? Stewart Glendinning: So, Bobby, Stuart, we have built in some improvement in shrink as we move forward. I mean, we've made these changes to people and process. We're investing money in our secure in our asset protection. And we expect that to bend the trend. So that is built into the forward expectations. Operator: Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question. Chuck Grom: Hey, thanks a lot. I have just a question on the SG&A line. In Slide nine, you talk about the unit trend going from 100 to 89. So there's a clear benefit, you know, from running fewer units through the store on freight and handling expenses. But when we look at the core SG&A line, can we unpack the 160 basis point increase in SG&A? And then also looking ahead to the fourth quarter, how are you thinking about the complexion of both gross margins and SG&A in the last quarter of the year? Stewart Glendinning: Yes. So Chuck, Stuart, when you really look at SG&A in total, the big driver for SG&A increases is really in-store payroll. That whole space. We do have some increases, as we said before, both in D&A based on store investments and also in general liability claims. Those are probably the big areas to think about. If I unpack the store payroll for you a little bit earlier in the year, we commented on the fact that first, we were faced with some rate increases. A number of those were driven by state minimum wage increases. With the increased investment in hours, and a third was stickering. Let me come back now to your unit point, and I because I want to look forward to next year. If you're thinking about next year, the stickering is sort of largely gone. So that piece is not gonna be pushing on our P&L. In fact, that's a benefit. The rate increases, we believe that that rate is going to start to moderate, and that's going to help us next year. And then the last piece on the hours side, actually, the hours side, exactly the point you've just made. The success of multi-price, in fact, allows us to move fewer units through the store. Do we invest some hours in running stores better, that'll give us the flexibility to decide do we take the unit do we take the hours down. Hopefully, that gives you a good flavor for your question. I think it puts us in a better position overall. Operator: Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Michael Creedon for any closing comments. Michael Creedon: Hey, thanks for joining us today, and we wish everyone a safe and healthy holiday season. Enjoy the rest of your day.
Operator: Welcome to the AEO Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead. Judy Meehan: Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle and Aerie; and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find our third quarter investor presentation. And now I'll turn the call over to Jay. Jay Schottenstein: Thanks, Judy, and good afternoon. I hope everyone had an enjoyable Thanksgiving weekend. I'm extremely pleased with the trend change we've seen across brands, reflecting a number of decisive steps we've taken from merchandising to marketing to operations. These deliberate actions are having a positive impact on our near-term results and also serve us well for the long run. We delivered record revenue in the third quarter and very strong momentum has carried into the fourth quarter. We're seeing an encouraging response to the newness the teams are delivering with each new collection gaining steam, most notably, Aerie and Offline are generating exceptional growth across categories. As discussed last quarter, we have made incremental investments in advertising, which is contributing to stronger demand while better positioning our business for enhanced long-term brand awareness and overall customer engagement. At the same time, we are focused on operational improvements and cost efficiencies to drive higher profitability in what continues to be a dynamic macro environment. Turning to the quarter. Total revenue increased 6% to $1.4 billion, a third quarter record. Operating income of $113 million exceeded our guidance of $95 million to $100 million, fueled by higher-than-expected demand and well-controlled costs. As previously noted, our results also included about $20 million of net impact from tariffs. Diluted EPS for the quarter of $0.53 increased 10% compared to the adjusted EPS last year. The strong top line reflected a return to positive comps, which increased 4%. This was a meaningful acceleration from the 1% decrease last quarter. Improvement was made across both brands and channels, all posting positive comps. Aerie's 11% comp in the third quarter was a real standout where strong demand was broad-based across all categories. Growth accelerated throughout the period, which has continued into the fourth quarter, where we are seeing exceptional demand so far. As we look to the future, we continue to see untapped opportunities within Aerie and Offline, which are rapidly emerging as important customer destinations. At just under $2 billion in revenue and less than 5% market share, this indicates a significant runway for future expansion, underscoring our ability to capture a much larger piece of the market as we execute our strategic initiatives. American Eagle's comp growth of 1% marked a sequential improvement from last quarter. Strength in jeans, coupled with better results in men's were among the drivers. As Jen will review, AE's business strengthened with greater in-stocks in our strongest sellers and new product flows. Positive trends have continued so far in the fourth quarter, including a terrific Thanksgiving weekend. Beyond product, our results have benefited from the success of our recent marketing campaigns, which have driven engagement and attracted new customers. We are encouraged by the impact of the campaigns and collaborations with Sydney Sweeney and Travis Kelce and now holiday gifting with Martha Stewart. We see measurable benefits, especially across our digital channels. Looking forward, we will build on this momentum with more exciting campaigns ahead. All in all, I'm very pleased with the progress and meaningful turnaround from the first half of this year. Now the holiday season is upon us, and the fourth quarter is off to an excellent start. We are seeing a clear acceleration from the third quarter, including a record Thanksgiving weekend with strong performance across brands and channels. As a result, we are raising our fourth quarter outlook. We remain well positioned with exciting new collections centered on gift-giving and events planned throughout the season to continue to delight our customers. Before I turn it over to Jen, I want to take a moment to acknowledge our incredible team for all their hard work and tremendous dedication. Their efforts have fueled a meaningful trend change across our leading brands. Great work continues, and I couldn't be more optimistic about the long-term outlook for our business. We look forward to driving more success as we head into 2026 and beyond, driving profitable growth and enhanced value for AEO. Let me turn it over to Jen. Jennifer Foyle: Thank you, Jay, and good afternoon, everyone. I am very encouraged by the stronger performance across our brands, marking a significant turnaround from the first half of the year. This demonstrates the resilience and product leadership of our portfolio of iconic brands. The increasing customer demand, which has accelerated in the fourth quarter, is spanning new and existing customers, fueled by a well-coordinated effort across both merchandising and marketing. Compelling product collections, combined with higher engagement and expanding brand awareness are driving our performance. And the teams are executing very well, leveraging our expertise in key categories and most importantly, by listening to our customers. Let me walk you through a few highlights in the third quarter, beginning with Aerie. The Aerie brand continues to exceed expectations. We achieved record revenue with the third quarter comps up 11%, fueled by strength across all categories, including intimates, apparel, sleep and Offline. Aerie and Offline's performance has been especially impressive with a meaningful acceleration in demand since the spring season. In fact, comps have strengthened with each new delivery. The resurgence in intimates has been very encouraging with solid growth in both bras and undies. Greater depth and breadth of our signature fabrications, strength in new fashion across bralettes and bra tops and fun prints with matchbacks to apparel are just a few highlights fueling the brand's double-digit growth. Aerie apparel remained consistently strong, driven by bottoms, fleece, tees and sleep, which has emerged as a powerful growth category. Offline by Aerie also continues to gain meaningful mind share as we expand awareness and move into newer markets. We remain highly focused on growing the Activewear segment. We are building on our signature fabrics and franchises such as our core leggings while also launching newness with updated fashion silhouettes. Needless to say, we are very excited about our future for both Aerie and Offline. We are well positioned for the remainder of the holiday season and continue to believe in the substantial long-term opportunities ahead. Now moving to American Eagle, which posted a positive 1% third quarter comp, demonstrating a meaningful improvement from the spring season. Positive demand was fueled by trend right new fall collection combined with bold marketing and exciting product collaborations. Underpinned by our dominance in denim, our strategies to reset the brand and firmly position American Eagle at the center of culture are beginning to yield results. The quarter marked an improvement in our men's business, where we saw nice wins across tops, sweaters, fleece, graphics and knits, all areas we have been working to recapture. Bottoms provided a stable foundation with jeans and non-denim pants trending positive. And favorable trends have continued into the fourth quarter, reflecting the positive reception of our new product. In women's, although we had a very good back-to-school season, the quarter in total was not as strong. Robust demand early in the period led to a number of out of stocks in some of our best-selling items. Non-denim bottoms, shirts and dresses proved more challenging, while knit and fleece tops as well as jeans were positive highlights where we continue to see strong demand. And importantly, better in-stocks late in the quarter drove positive results, which have continued into the fourth quarter. AE is a true holiday destination with amazing gift-giving focus combined with fun fashion and party dressing. The response to date has been highly encouraging. Now shifting gears to marketing. This fall season, American Eagle launched its largest, most impactful advertising campaigns ever, which are delivering results. By collaborating with high-profile partners who are defining culture, we are attracting more customers and have more eyes on the brand than ever before. Combined, the Sydney Sweeney and Travis Kelce partnerships have garnered more than 44 billion impressions. Total customer counts are up across brands and customer loyalty grew 4% in the quarter. AE is clearly building long-term awareness and desirability and has captured the attention of both new and existing customers. Traffic has also increased consistently throughout the quarter, which is most evident within our digital selling channels that include both AE and Aerie. Although it's still early days of our renewed marketing strategy, we know that having the right talent amplifies our brand and product at key moments. We are very encouraged by our progress and expect to continue fueling brand excitement into 2026 and beyond. Our recent holiday campaign with Martha Stewart is yet another example of how we are creating fun moments to delight our customers while reinforcing our position as the go-to gifting destination. The holiday season is in full swing. And as Jay mentioned, we are encouraged with the results so far. We are heads down and focused on the rest of the year to deliver long-term sales and bottom line growth. Thanks to our amazing teams, and thanks to all of you for your ongoing support. I wish everyone a happy and healthy holiday season. And with that, I'll turn the call over to Mike. Mike Mathias: Thanks, and good afternoon, everyone. I'm pleased to see the steady progress throughout our business, which led to strong revenue and profit above our expectations in the third quarter. In addition to generating a meaningful top line improvement, we successfully controlled costs, created efficiencies, managed promotions and navigated through a highly dynamic sourcing environment, minimizing the impact of tariffs. Consolidated revenue of $1.36 billion increased 6% to last year, fueled by comparable sales growth of 4%, with Aerie up 11% and AE up 1%. We saw growth in transactions across brands driven by higher traffic. The average unit retail price was flat to last year. Gross profit dollars of $552 million increased 5%, reflecting higher demand. The gross margin declined 40 basis points to 40.5% compared to 40.9% last year. Net tariff pressure was as expected at $20 million or 150 basis points. Higher markdowns were largely offset by positive sales growth and lower non-tariff costs, including favorability in freight. Buying, occupancy and warehousing leveraged 20 basis points due to higher sales and a continued focus on operational improvements. For example, we drove lower cost per shipment within our direct business, which has been an area of ongoing focus. SG&A increased 10% due to investment in advertising as previously discussed. With our focus on long-term brand benefits, the campaigns are already delivering results and helping to advance our goal of expanding our reach and generating growth across brands. The balance of expense is leveraged, reflecting our ongoing cost management program. Operating income of $113 million was above our guidance of $95 million to $100 million, driven by stronger-than-expected demand. The operating margin of 8.3% declined from an adjusted margin of 9.6% last year. Consolidated ending inventory cost was up 11% with units up 8%. Inventory is balanced across brands, reflecting better in-stocks for American Eagle jeans, new store openings and the demand acceleration at Aerie and Offline. The increase in cost includes the impact of tariffs. Third quarter CapEx totaled $70 million, bringing year-to-date spend to $202 million. We continue to expect CapEx of approximately $275 million for the year. As a reminder, this includes a onetime spend of about $40 million to relocate our New York design center as we previously disclosed. We're on track to open 22 Aerie and 26 Offline stores, which are coming out of the gate quite strong. We'll complete about 50 AE store remodels with full upgrades to our modern design. A few great examples of recent store upgrades are the Aventura Mall and Sawgrass Mills in Miami and our new SoHo location in New York City. All of these A+ stores are among our best, and we want to ensure the customer experience is unmatched. The upgraded footprints have allowed us to showcase our signature brands, AE Aerie and Offline. We're utilizing new technologies to elevate the shopping journey and create a cohesive and modern retail experience. Overall, our remodeling program is generating comps nicely above the average. As we continue to position our fleet for profitable growth, we're also on track to close about 35 lower productivity AE stores. Our capital allocation priorities remain unchanged, and we're focused on prudently investing in growth to continue to build our brands while returning excess cash to shareholders through dividends and share repurchases. As a reminder, during the first half of this year, share repurchases totaled $231 million and year-to-date dividend payments have totaled $64 million. We have a strong balance sheet and ended the period with cash of $113 million and total liquidity of approximately $560 million. Now turning to our outlook. The fourth quarter is off to an excellent start. As the team noted, we're encouraged by the broad-based strength across brands and channels with particular strength in Aerie and Offline. Our inventory and product offerings are well positioned to deliver a successful holiday season, and we're all focused on achieving a strong fourth quarter result. Based on quarter-to-date sales trends and the recognition that we have important selling weeks still ahead, we are raising our fourth quarter operating income guidance to a range of $155 million to $160 million based on comp sales growth of 8% to 9% with similar growth in total revenue. Guidance includes approximately $50 million of incremental tariff costs. Buying, occupancy and warehousing costs are expected to increase due to new store growth for Aerie and Offline and increased digital penetration. SG&A is expected to increase in the low to mid-single digits, driven by investments in advertising. Given the top line strength, we expect both BOW and SG&A to leverage in the fourth quarter. The tax rate is estimated to be approximately 28% and the weighted average share count will be roughly 173 million. To wrap up our prepared remarks, clearly, we're very encouraged by the progress made across our brands. We're highly focused on delivering the remainder of the year, driving strong profit flow-through and sustaining this momentum into 2026. Now we'll open up the call for questions. Operator: [Operator Instructions] The first question comes from Jay Sole with UBS. Jay Sole: My first question, I think, it's for Mike. You talked about the acceleration of fourth quarter to date, and you raised the guidance, the comp guidance, I think you said 8% to 9%. That's pretty significant from where you ended Q3. Can you just talk about where you're trending quarter-to-date to be able to guide to that level? And what's driving the acceleration. And then maybe for Jen, you mentioned strength in denim. If you could elaborate a little bit if people aren't wearing skinny denim like they were, like what are the new silhouettes that are working? And how durable are those trends? Do you think the trends that you're seeing can last well into 2026 or beyond? And if you can help us on that, that would be great. Mike Mathias: Yes. Thanks, Jay. I can talk you through the guidance. So the 8% to 9% comp increase includes a nice improvement or acceleration for both brands quarter-to-date from what we just reported in Q3. I would say if you want to break it down by brand, we'd be looking for the AE brand to be in the low to mid-single digits and Aerie in the high teens, mixing to that 8% to 9% comp. And both brands are ahead of that quarter-to-date, but we know we've got some big weeks ahead of us, only about half the quarter in, but definitely pleased with how November turned out and where we are quarter-to-date through the Thanksgiving weekend. Jennifer Foyle: Yes. And Denim has been very strong. In fact, particularly in women's, we saw acceleration throughout the quarter, getting into the back half of Q3 and into black. It's been our #1 Black Friday as far as denim is concerned. The jeans are certainly winning for us. And as you know, that's our key competency business. Look, silhouettes are changing faster than ever. And I always reemphasize that our teams strategically do just extensive testing and scaling. And we did have some out of stocks, particularly in women's in Q3. Sydney Sweeney certainly accelerated some of that, and we needed to move swiftly to get back into business. And I like what we're seeing at the end of Q3 and headed into Q4 with the denim business. So we're excited. Operator: And the next question comes from Matthew Boss with JPMorgan. Matthew Boss: Congrats on the improvement. So Jen, at Aerie, maybe if we could dig a little deeper. Could you speak to the drivers of the same-store sales improvement over the past two straight quarters? And with that, I guess maybe could you break into customer acquisition trends that you're seeing and initiatives in place to sustain double-digit comp growth in your view? Jennifer Foyle: Yes. It's certainly exciting to see Aerie back on track. Coming off of Q1, we definitely needed to pivot as a team, and we really hunkered down and really thought about our strategy and what we needed to get back to win, not only coming from our core competency businesses, which all accelerated and have been accelerating starting in Q3 into Q4, but also there's new businesses in town. Sleep is doing quite well for us, and it's proving to be a year-round business for us. So a new category there. So obviously, we have Offline too, which is our secondary business coming off of Aerie and that business has proven where you're hearing some decel in the athletic apparel areas. We're holding our own and our leggings are still tried and true and winning for us. The customer acquisition has been strong. Our customers are spending more. We're seeing even so. So coming off of Q3, as we head into Q4, they're actually -- our acquisition has been accelerating. Last week was an incredible week for Aerie, where we saw a huge amount of customer acquisition. So we are taking advantage of our traffic. We're winning our customers. I think we're showing up really proudly. We launched our new 100% real campaign, which is tied to our core competency of how we launch this business, what our platform is. And it's talking to our community, it's speaking towards-- it's playing off of no air brushing our models. And now we've leveraged some of that into the AI world and thinking about how we approach that differently. So Aerie does things differently. We always think into the white space that sometimes can be scary, but we're so proud of what we do in this brand. And I think the team is doing an incredible job leveraging our community, amplifying marketing, but also it's 100% about our product. What we do every day is about our product and winning our customer. Matthew Boss: That's great. And then Mike, could you speak to expectations for markdown in the fourth quarter relative to the third quarter just overall health of your inventory? And how best to think about gross margin levers remaining into next year? Mike Mathias: I can start with inventory, Matt. I mean we're very pleased and comfortable with the plus 11 in total dollars, plus 8 in units, is positioned well to continue to fuel this Aerie and Offline trend. We definitely, as Jen talked about in her remarks, kind of resetting some denim inventory to make sure we're continuing to be in stock and don't miss a sale within the AE jeans category. And again, that plus 11% cost includes the impact of tariffs along with just supporting those businesses. On the markdown front, look, we competed in the third quarter. Markdowns are up a little bit in terms of the total impact to the quarter. We expect Q4 to be similar. We're just be ready to compete in these big days. We competed over the weekend. This November trend that we've seen or the quarter-to-date trend includes a little uptick in markdowns to compete. But definitely winning in terms of the top line growth and the overall margin dollar growth attached to that. And it is in a couple of places. I mean, Aerie is similar markdown rate to last year. So we're driving this trend on markdown rates similar to history. We're not driving it through promotion. And then it really is competing in jeans more than anything from a category perspective that's adding to the markdowns a bit. But we're -- we think that's the right strategy from here. Gross margin then in total, really pleased with the third quarter results. We talked -- we disclosed or we hit the $20 million guidance roughly on the tariff impact. That's about 150 basis points. But as you can see, gross margin only deleveraged by 40 baiss points on four comp. So the team is doing a great job, not only just mitigating tariffs on the front end, but then finding kind of opportunities and efficiencies on other non-tariff impacted line items within our costs. We highlighted freight but there's more work than just on the freight line. So Q4 is similar. I mean, we're guiding to a $50 million impact and kind of the net absolute value or the net impact of that -- absolute impact of that would be about 300 basis points. But we're obviously not guiding gross margin down that much. So we expect to see the same opportunities in terms of offsets and other line items. And then just on an 8% to 9% comp, obviously, we're leveraging a lot of expense lines that are up in gross margin, including and BOW, so including rent, digital delivery, distribution costs, compensation up there as well. But other cost line items within our product costs are being leveraged, too. So we continue to expect to do that going forward. Operator: And the next question comes from Paul Lejuez with Citi. Kelly Crago: This is Kelly on for Paul. I guess first question for you guys. Just could you talk about why -- given you've had these very splashy and high-profile marketing campaigns that were more kind of -- more based on American Eagle marketing campaigns, like why you didn't see that accrue more to AE versus what you're seeing in Aerie, where it seems like you're benefiting a lot from whether that's the product assortment or maybe some of the marketing campaigns. Just help us kind of understand what's happening there. And then just secondly, on the tariff impact, I think you said $50 million impact in the fourth quarter. Is that the right net tariff impact that we should be thinking about for the first half of '26? Jennifer Foyle: Sure. As a company, we're leaning into advertising, we need to compete. When we see what our competition is doing, there was definitely opportunity for us to lean in. And certainly, Sydney Sweeney and Travis, I mean, with the 44 billion impressions, really it was something that we did not expect. And certainly, I mentioned some of the out-of-stocks in women's particularly, but men's certainly turned around in the mid-single-digit comp zone. And that was really -- we are so pleased to see that. And I just wanted to say sometimes there's a halo effect in marketing, right? So as we saw -- as we got into -- as denim, we got our stock in stocks back to more normalized levels towards the end of the quarter. We saw acceleration, particularly in women's and into black. As I mentioned, it was an incredible week for us, Thanksgiving week and Friday was amazing. So we're seeing the results now. And look, this is important for our future. We need to remain strong and competitive, and we need to amplify our product. The teams have been working tirelessly on this price value equation that I think American Eagle does better than anyone, and we're leaning in, and this marketing will certainly amplify. Jay Schottenstein: Jen, I'd like to also add -- we've also seen a significant increase in our loyalty members, too. We saw over 1 million more loyalty members join us in these past few months. And as Jen said, you don't see it right away. As you also pointed out that it's interesting with Sydney Sweeney, the jeans that we have made specifically for Sydney Sweeney, they sold out like within 2 days. They boomed right out right away. Mike Mathias: Then I can take the tariff question. I think maybe the best way to provide some color is just to give the quarterly impact. So we'd expect to go forward, if tariffs hold as is in terms of the impact, we'll see how that continues to progress, about a $25 million to $30 million impact in each of the first and second quarter. So call it, somewhere between 200, maybe 200 to 225 basis points of impact in Q1, same impact in Q2, $40 million to $60 million, call it, in the first half. Next Q3 on the $20 million we just incurred in Q3, we expect Q3 on a full basis to be about a $35 million to $40 million, so call it, $15 million to $20 million impact incrementally next year. And then with the anniversary roughly the $50 million that we're guiding to this fourth quarter. So it's about a 200 to 225 basis point impact on a full year basis. And -- but again, with continued offsets in work, we'd expect the gross margin to not be impacted to that level just like we've seen here in Q3 and Q4. Jay Schottenstein: And Mike, there may be like as Supreme Court ruling coming on shortly, too. It may have changed everything right away. Kelly Crago: So the assumption then would be that you would be taking some like-for-like pricing into next year? Mike Mathias: Yes. I think, I mean, on the pricing front, we definitely do not have a specific strategy to pass through the impact of tariffs to our customers. We continue to take shots where we know we can, where we're making price moves that we still fit within our price value equation that the customer expects, and we don't see any resistance to those price changes from the customer. And just ticket changes that allow us to create a little more room on the promotional front, too, to make some decisions within our lease lines. So we'll continue to do that. I think we're seeing success doing or approaching it that way in the back half right now. We'll continue to do that in next year. Operator: And the next question comes from Jungwon Kim with TD Cowen. Jungwon Kim: You mentioned strong customer acquisition across both brands. Maybe you can give us a little bit more detail around who those customers are and if you're gaining more higher income cohorts. Just curious on who you are gaining share from as you acquire new customers? And then another question, just a follow-up to that is, what are your strategies around retaining those customers you gained in the last 2 quarters? Jennifer Foyle: Look, both brands have -- our customer file is stronger than ever. And -- we certainly have seen acceleration, as I mentioned, going into even leaving Q3 -- exiting Q3 and going into Q4 with some really high -- it's really high-end problems here that we're seeing. Look, it's what we do every day. Our teams need to certainly focus on the retention. And we've been all year long, that's what we've been up to. Our retention is not even -- we're winning on retention. We are winning on customer acquisition. The teams have strategies. Those I tend to not share publicly, but the strategies are already paying off. You can see it in the news that we're just reporting today. We're getting talent. We're working on our influencer programs, but we're also working on our communities. And that is the most important thing. We have powerful brand platforms that we stand for something, and it wears the test of time. And when that works and we have the great product attached to it, we can win and show up in a new way. And the teams have very many strategies, whether it's upper funnel, getting out there and bringing in new customers or working on our performance marketing spend and our influencer strategies. So it's not only -- it's never about one part of the strategy. It's about getting the product right first and making sure that our tactics will amplify that strategy. Certainly, Sydney -- an example, Sydney and Travis, but even the more recent Martha, I mean, that is talent, that's upper funnel. That is us getting our brands out there in new ways. But if you lean into Aerie and how they're working, their marketing strategy, they're leveraging our community in a new way and showing up with how do we go from not air brushing our models I just mentioned into what does AI mean to such a pure brand as Aerie with such an amazing platform. So it is about -- we have two different brands. We have a portfolio of brands in the same token that we leverage our brands. Certainly, we share a platform, but it is about making sure that we play up each brand DNA in the right way, and it's working. That strategy is working. I can just -- I can say that now, and there's work to do always. As we look ahead, we have exciting collaborations, new talent and just new ideas. We're constantly thinking of new ideas. Operator: The next question comes from Rick Patel with Raymond James. Rakesh Patel: I wanted to double-click on your expectations for AUR in Q4. As we think about the company remaining competitive with promotions, but also factoring in some product and perhaps some pricing wins, where do you see AUR landing in the fourth quarter? And then second, what are your expectations for where inventory will end the year, both in terms of dollars and units? Mike Mathias: Hey, Rick, yes, the AUR for the third quarter was relatively flat even with a bit of a markdown increase, just the mix of the businesses between the brands, category mix, our AUR was relatively flat at the company level. We're expecting a similar thing in Q4. November to date here, we saw it play out that way. Aerie is actually driving these comps on some uptick in AUR. We know we're spending a little more markdowns in the jeans category in AEs to drive the business. So the mix for the quarter, we'd expect right now to be similar around a relatively flat AUR for the fourth quarter. And I think it's the way we really expect to plan the business go forward. Rakesh Patel: Great. Any thoughts on inventory? Mike Mathias: Q4, we're not providing specific guidance, but at the end of the day here with the uptick in the trend exceeding plans, we're definitely in chase mode here, which is a good thing when we make -- we have -- we see a lot of profit flow-through when we're doing that, especially on the Aerie side of the house. So we expect inventory in line with sales. We're guiding to the plus 8% to 9% comp. And as of now, I'd expect similar kind of inventory in line with sales or at least units in line with the sales growth, knowing there will be a tariff impact ongoing. But we're not providing specific guidance at this point, but that's what we'd expect to see. Operator: And the next question comes from Chris Nardone with Bank of America. Christopher Nardone: So first, can you just refresh us on how we should think about plans for both the Eagle and Aerie store fleets heading into next year? And if the recent results of both businesses has changed how you're thinking about that versus maybe 90 days ago? Mike Mathias: Yes, Chris, I think for the AE brand, we talked about closing roughly 35 stores at the end of this year. We're looking forward into plans next year, and I expect that to slow down as we've largely closed, I think, over the last 3, 4 years, kind of the lower productivity stores in the fleet in the mainline AE fleet. So 35 at the end of this year here in January, maybe something lower than that, I would expect next year. On the Aerie and OFFLINE growth front, we talked about 22 Aerie, 26 OFFLINE openings this year in 2025. We're looking at a similar 40 to 50 store count at the moment, probably similar weighting offline, a little more -- a little higher count in OFFLINE than in Aerie. But we are looking at this tremendous growth, and we'll -- if we did anything, we'd maybe accelerate some openings on the Aerie and OFFLINE side, but those plans are still in work. Right now, a similar 40 to 50 count is what's in the plan. Christopher Nardone: Okay. Got it. And then just a quick follow-up. I think you alluded Aerie comps are running above the high teens for the quarter, quarter-to-date. And if AUR is roughly flattish, can you just unpack a little bit further? It sounds like you're seeing inflections across the product suite, but are there particular channels, whether that's digital versus retail or certain categories where you're seeing the biggest inflection? We're just trying to understand a little bit better what has changed so drastically over the last 6 months. Mike Mathias: Yes. Look, correct. The guidance we're giving at the 8% to 9% comp, I'll just reiterate, American Eagle low to mid-single expectations, Aerie high teens. Both brands are running ahead of that trend November to date or through the Thanksgiving weekend. Digital ahead of stores. And I think the marketing campaigns that Jen and Jay are talking about, the traffic we're seeing digitally off of those campaigns is significant, and that's where we're seeing a lot of the gains from those efforts and from the effectiveness of those campaigns. So digital was -- both channels were positive in Q3, but digital was on the high end or the high single-digit level for Q3. And we'd expect for Q4 at a plus 8% to 9%, same kind of outcome that digital would really outpace stores, and we've seen that through November and especially over the holiday weekend here where both channels were positive, and we're happy with the success in both channels, but digital is where we're seeing the outpaced growth at the moment. Jennifer Foyle: And in Aerie specifically, I mean, as I mentioned before, men's, we saw an incredible turnaround. And Aerie specifically, all categories are working. Look, the team -- when you have to pivot coming off of Q1, we focused on our product and winning that customer back and ensuring that we could get that momentum that we deserve again. This brand is incredible. And I did want to say, I need to remind everyone on this call that Aerie's brand awareness is only at 55% to 60%. So when I think about our opportunity as we build into 2026, we have an incredible runway in front of us. So we're pulling in product as we speak. We're chasing and the team is working fast and furiously so that we can continue this momentum into next year. Jay Schottenstein: And also, Jen, I think our merchandise is better, too, which help. Jennifer Foyle: I'd like to say that, yes. Operator: And the next question comes from Alex Straton with Morgan Stanley. Alexandra Straton: Congrats on a nice quarter. On these big campaigns that you guys have pursued, can you just give us some context on where you think you'll end the year on marketing expense as a percentage of sales versus typical? Like are you investing more than history? And then as we think about next year, should that line item continue to move higher? Or how do you think about kind of that flywheel between the marketing investment and growth? Mike Mathias: For this year, yes, we're -- I mean, obviously, we made a significant investment in Q3. Q4 is up as well within our guidance, not anywhere near the increase on a percentage basis that Q3 was. Really pleased with the SG&A leverage we'll see in Q4 off of this comp guide. Advertising is still deleveraging a bit, but we're leveraging all other expense categories as intended pretty significantly in the fourth quarter. For the year, we're going to wind up somewhere in the mid-4s as a percentage. And historically, we've been more in the -- I think last year, for example, around 4%. So we're definitely resetting a baseline for advertising spend at the moment. It's working. We're continuing to monitor it. Jen and I and our teams are working very closely and cross-functionally on really on a week-to-week basis, how we're pulsing the spend in advertising on top of the campaigns that are obviously planned well ahead of time. I'd expect -- we expect in our initial plans here for next year is to continue this in the first half, possibly passing more toward a 5% type of rate to reset ourselves and then leverage all our expense lines, funnel some expense or some investment toward advertising and anniversary this come next year around this time in the third quarter. I think that 5% is a good sweet spot that we'd like to maintain over time. So as we're kind of resetting the baseline, we're pathing towards 5%, like the top line growth we're seeing from it. Again, just to reiterate, anniversary it come next year and start to just maintain that type of rate, and we'll evaluate things from there. Jay Schottenstein: And Mike, and trips in the bank, too. We're not saying we have more trips in the bank. Mike Mathias: Yes. More to come. We'll talk -- we have some things on our fourth quarter call in March probably to talk about more exciting things to come. Alexandra Straton: That's great. Maybe one follow-up for you, Mike. Just kind of zooming out here. I know there's been some wrenches in your medium-term outlook since you provided it a couple of years ago. But maybe as we move into the final year of that plan and excluding some of the noncontrollable headwinds like tariffs, can you just like, big picture, talk about where you've made the most progress versus that plan and where there's still more work to be done in this final year here? Mike Mathias: Yes. I'll start on the top line. I know we obviously had a few missteps here in the first half of the year in the first quarter, but the net result of this year with this guide is actually going to wind up kind of in that low to mid-single or within the algorithm we've talked about wanting to achieve every year. So we'll be at a kind of low single-digit trajectory on the full year with this back half being kind of the mid- to high single-digit range. So I think that's the continued focus. I'd also say we made a lot of headway in just the culture change around expenses in total. So we continue to control costs across the P&L. I think the leverage that we're seeing here in BOW, this back half of the year and then SG&A in this fourth quarter is a testament to that. Even with the significant increase in advertising this year that you just asked about and I just provided the calendar on all the other SG&A line items are leveraging in this year. And SG&A in total will be relatively flat on the year at the kind of the low single-digit total year outcome. So I think that's a big change for us over the last several years. It's been a massive focus to have a different mentality around controlling expense. It's allowing us to funnel some of these dollars toward advertising. And so we'll continue to do that. And yes, to your point, the tariff headwind is something we can't control. But I mean, our goal is still this 10% aspiration. Tariffs are going to set that back a little bit. But we're going to continue down the path that we're on, on controlling all other costs, investing some dollars in advertising, fueling Aerie and OFFLINE, hitting that kind of low single plus trajectory in AE and passing back toward that 10% that is still our ultimate goal. Jay Schottenstein: Yes. And Mike, as a general thing, this team after the first quarter, and Jen couldn't emphasize it enough, really took a hard look at everything. We went through all the different areas of the business, every single area, every opportunity the merchandise to the operations, looking where -- what's important, what's not important to the company. The dedication of the associates have been amazing in the last few months, and I'm so proud of this team because that first quarter, we got kicked very hard and nobody quit. Nobody cried about it. Nobody quit. Everybody went to figure out how can we do things better, transformational, looking for where the real opportunities are, looking for where we should go in the future, where the opportunities are and what's it going to take to be the best. And one thing I'm very proud of, if you go into our stores, we have the best-looking stores, the best maintained stores in the mall. If you walk in the mall, our stores look the best. If you go look at our new stores, you go to down to SoHo and you look at our new store we just opened in SoHo, you go to Aventura down in Miami, you'll be very impressed by the stores. They're very, very impressive stores. They're very functional stores. And so I think that we're very excited. I know what we have planned for marketing next year. I know where the merchants are focused. I know the excitement that everybody has in this company, and it's going to be great. Operator: And the next question comes from Janet Kloppenburg with JJK Research Associates. Janet Kloppenburg: Congratulations. And I agree the stores look terrific. Aerie in particular, but American Eagle as well. I just wanted to ask about -- I think you had to chase product earlier in the year as well, Jen. And I'm wondering what's going on there and if that situation is resolved now with the comps being as healthy as they are. And then for Mike, on a 4% comp, you weren't able -- did you leverage buying an occupancy? I think you may have. And what is the target point on that? And in terms of price increases, are they all behind you now? Have you taken them all? Or are there more to come? Jennifer Foyle: Yes, for sure. Thanks, by the way, Janet. We -- it's -- primarily, it's been in women's denim, to be frank. We've been sort of in chase mode since Q1. And quite frankly, we haven't been able to keep up with the demands. And as you know, we have a huge short business, and that business never really turned on. We expect shorts to turn on as we enter Q2, back half of Q1 into Q2, and that never happened. So then we continue to see this demand in long legs, and we really couldn't keep up with that demand. So moving into Q3, we felt like we were in a better position, but we wanted to be prudent as well with our inventories. As you know, denim is probably our higher cost of goods as well, but it's our biggest business. So it's always an art, managing that business. And with the launch of the Sydney Sweeney and actually Travis, we couldn't really keep up with that demand. The teams worked swiftly. We were definitely in the right businesses. We definitely had the right silhouette and the right investment in silhouettes, which led to some of that out of stock, good news there. Bad news, we needed a little bit more inventory to carry and to get that business -- to get women's in total because of the penetration of denim. So good news is certainly in the back half of Q3, we saw nice levels of inventory getting back into our key silhouettes. The top 5 jeans, just to give you some perspective, we planned at -- this is just top 5 jeans styles in women's. We planned up 25% they were up 50% on demand. So we had a lot of work to do. We feel better as we head into Q4. And nodding to what Mike mentioned, we're going to look at denim a little bit differently so that we're maintaining that business while we grow new categories. Mike Mathias: And Janet, on BOW, yes, we did leverage BOW by 20 basis points in the third quarter on the 4 comp. And then that's a good target for us that low to mid-single-digit result to leverage expense really across the board other than this advertising reset we're talking about. And then the fourth quarter on the 8% to 9% comp, we obviously definitely expect to leverage BOW at that kind of result as well. And SG&A will leverage significantly on that kind of result for the fourth quarter. Janet Kloppenburg: Okay. And then just on pricing? Mike Mathias: Yes. We talked about a little earlier. We're not -- I mean the AUR is flat for Q3. We're expecting similar AUR in Q4. We're not pathing through the impact of tariffs to the consumer purposely. We are taking our shots on price moves where, as Jen has said, keeping -- maintaining that price value equation that our customer expects and making sure we're not impacting conversion and give ourselves a little room on the promotional side when we do that as well. So we'll continue to kind of optimize that, take our shots, but net AUR similar to last year is the intent. Operator: And the next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Congrats on the great quarter. With this quarter-to-date acceleration, it sounds like a lot of it's been driven by traffic and new customer acquisition. Just wondering what you're seeing on conversion, particularly with some of the product improvements you've made. And then maybe if you can just share your thoughts on the Gen Z consumer. We've certainly heard a lot about that consumer potentially being pressured and pulling back, but it doesn't seem like you're seeing that at all in your business. So I would just love to hear your thoughts on kind of where the consumer is and how they're spending? Mike Mathias: Yes. I think on the metric side of things, traffic was definitely a driver in Q3. We continue to see that here in the fourth quarter through November. With AUR flat, it's been a mix of sort of traffic and then ADS or the UPT, part of the ADS equation, AUR flat, some uptick in UPTs and then traffic with conversion being relatively flat with AUR being relatively flat. That's sort of your mix of metrics that we saw in the third quarter and early days here in Q4, obviously, a big traffic uptick that we've capitalized on through November and through Thanksgiving, and we'll see how that continues to play out. But with AUR relatively flat, we would assume a similar kind of mix of metrics, traffic being a driver, ADS being a driver with AUR flat, conversion relatively flat, and we'll see how it pans out through December. Jennifer Foyle: Yes, we're not feeling that -- we're entertaining Gen Z in all of our brands. So even when you look at Martha Stewart, that might be a question mark, right, why Martha Stewart, but Martha Stewart resonates with Gen Z. That's a perfect example of what we're up to. We're seeing momentum in all age groups. We do have still some opportunity on the lower age scale in AE women's in particular, and we're up to invigorating some product to entertain that age bracket. But honestly, we're not seeing it. And also, this is a critical time to for gift giving, too. So we see mom and dad out there purchasing as well. Judy Meehan: Okay. We have time for one more question. Operator: And the last question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Mike, I just wanted to ask on SG&A for Q3 and Q4 and just kind of how to think about it next year from a dollar perspective. Is there anything that either comes in or goes out, whether it's marketing? I think you talked -- maybe you talked about incentive comp in prior years, how to think about that just structurally, understanding on a rate basis, obviously, with Q4 sales being so strong, there's going to be a bit of a delta there, but curious what you could unpack for us. Mike Mathias: Sure. Yes. I think, as I said, we'd expect to see some continued investment in advertising through the first half of next year, incremental to where we've been intention to pass toward, call it, that 5% rate annually. So we'll anniversary things in the back half that we're doing currently. Incentive comp is a bit of a TBD. We're still setting plans for 2026. Those annual plans are based on our EBIT target is the success metric. So we'll probably -- we'll give more color in March around 2026 SG&A and how we think that will pan out by quarter with advertising and possibly a bit of more incentive comp in the mix, but more to come in March. Corey Tarlowe: Great. And then just a quick follow-up on Aerie. The momentum has been very, very strong. Curious what you think is specifically working there versus the competition when you either walk the mall or view kind of the competitive set, how you think about your market share gains and the opportunity there? Jennifer Foyle: Yes. I did mention the brand awareness still is -- we have opportunity there. We're still only at 55% to 60%. So as we gain and look towards the future, we have a lot of opportunity there. It's never about one thing. Certainly, we doubled down on the product, the design team and merchant teams really came together and thought about our future strategies and where we were seeing some losses and how we recalibrated all of our categories. And the team did an excellent job from launching new ideas to rebuilding old franchises, i.e., undies. Undies is a fire starter for any order, any basket. And our undies tables have never looked better. So it's all about the product. But strategically, we built into promotions that makes sense, but we pulled back in other areas where it doesn't make sense. And then you layer on this great marketing campaign that we've had in Aerie, which it's been really resonating, 100% real. It's what we're all about. And the team has doubled down and our influencer campaign, getting our clothes on our influencers has been a real win. And there's more to come. We have so many great new ideas, innovations for the future. The team is 100% locked and loaded on thinking about each category, new fabrications, new ideas, new launches. newness in general has been a win for Aerie with our new drops, and that's been really working. So we have a lot in store for 2026. But in the meantime, we're pulling goods in for -- to pull out Q4. We're excited about what's happening right now.
Operator: Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Here's Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Ms. Leah Guo, Investor Relations Associate Director of the company. Please go ahead, ma'am. Leah Guo: Thank you. Hello, everyone, and welcome to Here's earnings call for the first quarter of fiscal year 2026. With us today are Mr. Peng Li, our Founder, Chairman and CEO; and Mr. Tim Xie, our CFO. Mr. Li will provide a business overview for the quarter, then Tim will discuss the financials in more detail. Following their prepared remarks, Mr. Li and team will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financial results on our IR website at ir.heregroup.com. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please note that all numbers stated in the following management's prepared remarks are in RMB terms, and we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in our earnings release and filings with the SEC. I will now turn the call over to the CEO and Founder of Here, Mr. Li. Peng Li: Good morning, everyone. Thank you for joining us today for our first quarter of FY '26 earnings call. This is a historic moment, our first earnings call, as Here Group following our business restructuring, which positions us a pure-play player in the global pop toy market. Today, I am proud to report that our first quarter as a fully focused organization has been one of the strong execution and accelerating momentum. We have completed the disposal of our non-pop toy businesses by September 30, 2025, allowing us to concentrate all our talent and resources on the immense global pop toy opportunity ahead. In Q1, we delivered total revenue of RMB 127.1 million, with our pop toy business growing 93.3% quarter-over-quarter from RMB 65.8 million, exceeding the higher end of our previous guidance RMB 110 million. Let me highlight our most impressive operational metric, which demonstrates the power of our focused strategy: Our total GMV across direct-to-customer online stores reached RMB 44.6 million this quarter. Fiscal year '26, Q1, has validated our capability to develop DTC operations, and our future DTC development strategy will align with our sales planning, new product launch schedules, and other operational activities. This operational momentum, along with contributions from our diversified sales channels, translates directly to strong financial performance. Our sharpened focus is also driving improved profitability, with gross margins expanding to 41.2%, up from 34.7% in the previous quarter. We ended the quarter with a solid balance sheet and strong asset base, reflecting our financial stability and operational strength. Now, let me walk you through how we're executing our two-pillar growth strategy and the tangible results we're seeing across our business. Our first pillar focuses on strengthening our IP ecosystem with a balanced portfolio. This strategy is delivering results across original proprietary IP creation, strategic partnerships of licensed IP, and cross-industry co-branding. A key element of this approach is concentrating resources on our flagship IP properties to maximize their market impact and cultural resonance. For WAKUKU, we launched WAKUKU On a Roll Series on November 29th. This new series brings collectibles into real-life scenarios, building emotional connections with young consumers who view these pieces as daily companions and personal symbols rather than just toys. By integrating lucky numbers into lifestyle contexts and offering versatile sizing, we transform youth interaction with collectibles into spontaneous social sharing moments. Every design element—s from trending colors to premium accessories like interchangeable silky cat head hats, —makes luck, a tangible daily experience. The launch was further enhanced by an original song and music video, creating a multimedia experience that extends the IP's culture reach beyond physical products. Our operational excellence demonstrates this strategy in action. WAKUKU-themed Street became one of Shanghai's most popular photography destinations in November, attracting young people and social media creators who generate diverse content through street photography and collection showcases. This capability —turning IP launches into cultural phenomena that drive organic community engagement —proves our ability to create compelling characters that naturally embed into young people's lives, becoming authentic expressions of personality and catalysts for cultural moments that extend beyond traditional product boundaries. Our flagship IPs continue to be powerful growth engines, with recent launches achieving record breaking performance, particularly in international markets. These launches show our systematic IP development capability and our ability to create emotionally resonant characters with compelling narratives. Looking ahead, we remain committed to adding value to our flagship IPs and newly launched IPs. Let me share our strategic partnerships that are expanding our cultural influence. We've formally established a strategic partnership with Beijing Radio and Television Station. The partnership covers content and cultural project cooperation mechanisms, including program co-creation, IP integration, and co-branded content production. This deep integration with mainstream media enhances our brand credibility and lays the foundation for nationwide media partnerships. Our pop toy IP participated in the official Golden Rooster Awards activities, including the Starry Sea gift sets, red carpet visual elements, and on-site interactive creativity, becoming one of the symbols of youth culture at this year's film festival. This collaboration achieved deep connections with China's mainstream entertainment industry. Our cross-industry co-branding strategy is elevating our brand into new consumer segments through diverse partnerships across entertainment, media, sports, and urban development. In the sports sector, we achieved a landmark milestone as the first official pop toy brand partner in China Open history, creating value across three key areas. From a media perspective, we generated over 200 million exposures and became a core tournament topic. In terms of athlete engagement, we secured authentic interactions and organic endorsements from global top players, including the world's number one ranked athlete, which drove strong celebrity same style demand. On the commercial side, our themed pop-up store generated millions in sales revenue, with multiple limited-edition items selling out immediately upon release. This success demonstrates the effectiveness of our pop toy plus premium sports events model, creating a seamless connection from brand awareness to actual sales conversion. In the entertainment sector, we've secured high-profile collaborations that expand our reach into mainstream pop culture. WAKUKU collaborated with the variety show, "Pijingzhanjí dí gege", Call Me By Fire, integrating our brand into China's popular entertainment landscape. This partnership demonstrates our ability to seamlessly blend pop toy culture with mainstream television programming, reaching diverse demographic segments. We also partnered with the local tourism government office to create an IP-themed Street featuring installations, interactive scenarios, and immersive photo opportunities in a core Beijing landmark commercial district. This project increased foot traffic and helped revitalize the area for younger audiences, providing a successful pilot for our urban renewal plus pop toy scenario operation strategy. These collaborations showcase our versatility in cross-industry partnerships, from premium sports tournaments to domestic variety shows and urban commercial districts, each designed to introduce our IP to new audiences while strengthening brand recognition across different consumer touchpoints These IP successes create the foundation for our second pillar—, our omnichannel approach, which amplifies these compelling brands across multiple touchpoints to drive efficient growth both domestically and internationally. In China, our social media matrix is delivering exceptional results. Our combined follower base across key platforms has reached 26,500. We have generated 679 million views on Douyin and 171 million views on RedNote—, demonstrating massive organic reach. This is converting directly to sales, with our Douyin flagship store GMV increasing 97.2% quarter-over-quarter. Offline, we are continuing to develop our offline DTC stores, which serve primarily as brand flagship experiences to showcase our products and strengthen brand presence in key markets. Our pop-up stores have generated over RMB 3 million in cumulative sales, and we have secured prime locations, which are all high-traffic locations in top-tier shopping districts including Shanghai, Beijing, and Shenzhen, for more direct-to-customer channels. Our first Beijing DTC store and our first Chongqing DTC store will open in December 2025. Two additional DTC stores in Beijing are set to open in early 2026. In addition, we have also launched Christmas and New Year themed pop-up stores to capture the holiday shopping momentum in Shanghai and Shenzhen. We participated in high-profile events including the 2025 China International Fair for Trade in Services, significantly boosting brand visibility, and generating qualified leads for our wholesale channel. Internationally, our momentum is accelerating across key markets. Our performance on TikTok Shop in North America has positioned us as a top player in the collectibles category. A standout success was our WAKUKU Panda series. Our overseas distribution network now covers around 20 countries including North America, Europe, Southeast Asia, and the Middle East. With this established infrastructure in place, we are now beginning to focus on enhancing sales performance in these markets as our supply chain capabilities continue to improve and our partnerships with overseas distributors deepen. This foundation allows us to rapidly scale our geographic footprint, while minimizing fixed infrastructure investments and leverage our partners' established retail relationships and local market expertise to achieve efficient market penetration. Underpinning our creative and commercial success is our integrated operational system, which represents a true competitive advantage. We are no longer in transition. We are in acceleration mode. With a pure-play pop toy strategy, a formalized two-pillar execution plan, agile supply chain capability, and a strengthened balance sheet, we are well positioned to capture the massive global pop toy opportunity and deliver sustainable, long-term value to our shareholders. The results this quarter validate our strategic choices. Our brands are resonating with consumers, our channels are scaling efficiently, and our operations are executing flawlessly. We have the momentum, the capabilities, and the resources to become a defining global player in the pop toy industry. I'll now turn it over to Tim for a detailed review of our financial results. Thank you, everyone. Dong Xie: Thank you. Before I go into the details of our financial results, please note that all amounts are in RMB terms, that the reporting period is the first quarter of our fiscal year 2026 ending on September 30, 2025. And that in addition to GAAP measures, we will also be discussing non-GAAP measures to provide greater clarity on the trends in our actual operations. We are pleased to report on solid financial performance this quarter, which demonstrates the successful execution of our strategic transformation into a product-driven pop toy company. Total revenue reached RMB 127.1 million with a gross margin of 41.2%, compared with total revenue of RMB 65.8 million with a gross margin of 34.7% in the previous quarter. Adjusted net loss from continuing operations narrowed to RMB 17.1 million, down from RMB 19.3 million in the previous quarter. These results reflect the success of our strategic business restructuring and the disposal of our non-pop toy businesses, allowing us to focus entirely on our high-growth Pop Toy segment. Revenues for the quarter were RMB 127.1 million, entirely generated from the sales of pop toys and the related activities, compared to RMB 65.8 million in the previous quarter. Gross profit for the quarter was RMB 52.4 million, compared to RMB 22.8 million in the previous quarter. Our gross margin increased to 41.2% this quarter from 34.7% in the previous quarter, reflecting the strength of our pop toy business model. On the operational front, total operating expenses were RMB 81.6 million for this quarter. To break this down, sales and marketing expenses were RMB 27.6 million. These expenses mainly included advertising and promotion costs aimed at enhancing product and brand visibility to accelerate growth and expand market share. As a percentage of total revenue, non-GAAP sales and marketing expenses, which exclude share-based compensation, decreased to 21.7% this quarter from 29% in the previous quarter. Research and development expenses were RMB 15.8 million. These expenses were mainly focused on advancing our pop toy portfolio through new product design innovation and establishing our integrated sales platform and data center infrastructure. These investments create a solid operational foundation to support future business expansion. As a percentage of total revenue, non-GAAP research and development expenses, which exclude share-based compensation, decreased to 12.5% this quarter from 13.5% in the previous quarter. General and administrative expenses were RMB 38.1 million. These costs reflected our operational functions including employee compensation, professional service fees, and other operational expenditures. As a percentage of total revenue, non-GAAP general and administrative expenses, which exclude share-based compensation, decreased to 23.2% this quarter from 26.3% in the previous quarter. Our net loss from continuing operations was RMB 25.8 million, compared with RMB 21.8 million in the previous quarter. Our adjusted net loss from continuing operations was RMB 17.1 million, compared with RMB 19.3 million in the previous quarter. Basic and diluted net loss from continuing operations per share were RMB 0.16 during the quarter. Basic and diluted adjusted net loss from continuing operations per share were RMB 0.11 during this quarter. Regarding our balance sheet position, as of September 30, 2025, we held RMB 789.4 million in cash and cash equivalents, restricted cash, and short-term investments. Looking ahead, we are excited about the growth prospects for our pop toy business. Based on currently available information, we expect revenues from our pop toy business to be in the range of RMB 150 million to RMB 160 million for the second quarter of fiscal year 2026, and in the range of RMB 750 million to RMB 800 million for the full fiscal year 2026. These forecasts reflect our confidence in the pop toy market opportunity and our ability to scale our IP portfolio and expand internationally. That concludes my prepared remarks. Operator, let's open up the call for questions. Operator: [Operator Instructions] And our first question today will come from Alice Cai with Citi. Please go ahead. Yijing Cai: I have two questions. And the first one, based on the second quarter guidance imply that the first half revenue is around RMB 280 million, right? So, to hit the full year target of RMB 800 million, second half revenue is to reach at least RMB 500 million, which is nearly double first half. What is the specific breakdown of this confidence? And is this cost driven by capacity, secure orders from retailers? Or is it based on projected sell-through of new launches -- new IP launches, I mean? And do we expect to turn profitable in the second half given the strong revenue guidance? And my second question is about the implication on the Labubu momentum. Do we expect -- is there any impact on our Labubu revenue momentum? Dong Xie: Okay. Thank you for your question, Alice. For the first one, regarding the guidance, the revenue forecast is primarily based on the following points: the timeline and pace of the product launches for different IPs and corresponding production capacity arrangements as well as the current production capacity and the inventory situation. It also takes into account the order from our customers' allocation and arrangements for the channel partners and self-operated online platform and DTC channels. Currently, our production capacity is expected to reach approximately 400,000 sets per month, equivalent to 2.4 million units in the near future, I think maybe by end of this year, which will help avoid severe supply chain shortages such as first half year from recurring. At the same time, based on the order situation for new products in the latest months, the subsequent product launch plans and the order placements from various channel partners, our projections can generally support the overall revenue guidance range for the fiscal year ending June 2026. I think, the core of our business lies in balancing IP operations and sales scale with a focus and priority on continuously extending and enriching the emotional value that the IP products bring to our users while achieving sales growth. We are striving to continuously realize and optimize this objective. Regarding the bottom line, I think the losses, especially the adjusted losses, excluding the share-based payment expenses, is narrowing. And also the losses incurred in the fourth quarter were primarily due to the short-term business adjustment for the business restructuring. Because the existing fixed cost structure and cost and expenses structure, including the fixed cost remained relatively high compared to our current revenue scale, of which many items are inappropriate with the legacy business, such as fixed expenses related to maintaining the listed company status, the audit fees and the leased office spaces based on the previous business model, all of which are currently being optimized. We are actively refining our cost and expense structure in accordance with the needs of the new business development. In the upcoming quarters, the proportion of similar fixed costs and expenses are expected to continue decreasing. Regarding sales expenses, I think one of the major expenses, we anticipate that the adjusted ratio will fluctuate around 20% of the revenue. The specific amount and proportion will depend on market conditions and the schedule of new product launches. During this rapid growth phase, we plan to allocate slightly more resources to branding and marketing to enhance the IP operation activities. However, consistent with our long-standing business strategy, we will not pursue growth through excessive spending. In the early stages, we aim to strike a balance between profitability and growth, and we are confident that -- this profitable growth will be achieved in the coming quarters. I think, the other question related to the product, especially for the IP. I think our peers, for example, the Labubu IP operations have achieved outstanding business performance and rapid growth. And we believe the market is closely following the latest developments of the Pioneer companies and other IPs. But as a pop toy company, we believe there is plenty of room for the growth in our industry. And according to a recent research report, the data from a research firm, the market of this IP pop toys is still growing very fast at a CAGR of over 18% in the next 5 years. So moving forward, we will continue to prioritize our IP operations, new product launches and brand building. The market has validated WAKUKU's unique appeal to the users. Let me share some sales numbers. The first generation of WAKUKU was launched at the end of last year and second generation was launched in the first half of this year in this May. All of the previous version of WAKUKU products, the cumulative sales up to now have now exceeded 6 million individual units. And we launched our new generation mini version on -- just now on November 29. The offline debut received very positive feedback and the online launch is scheduled for December 4. So the pop toy market has moved beyond its niche origins and now reaches a much broader audience. Going forward, we will continue to build our IP portfolio, creating distinctive and resonant IPs for different consumer segments. In product development, we will continue exploring the unique characteristics of each IP to develop new products that align with market demand. For marketing and promotions, we will integrate our operations with strategic marketing campaigns to continuously strengthen our IPs and maintain their long-term vitality. Yes. Operator: The next question will come from Liping Zhao with CICC. Liping Zhao: Congrats on your strong quarter. As Xie Dong just said that you guys are going to launch the DTC stores offline. Could you please share the latest updates on these stores and your future opening pipeline in 2026? And how should we expect the sales value of these DTC stores? Dong Xie: Thank you. I will answer it. Our key progress with offline DTC stores centers on building strategic of brand experience centers. The first batch of the stores are expected to open between late December this year and early 2026 in very early of January. Current preparations focus on decoration and operational systems, and I think we are getting ready. Our goal is to transform our DTC stores into immersive and interactive offline narrative spaces. This will serve as physical hubs for our brand culture and core basis for offline community engagement. In terms of channel synergy, our DTC stores represent a strategic investment in brand building and deepening user relationships. The goal is not only direct sales competition. Instead, we enhance overall brand momentum by providing unique immersive experiences. The approach reinforces and empowers the online DTC and KA channels. We are creating a positive cycle of offline experience, online engagement and omnichannel conversion. This ultimately strengthens our brand's omnichannel competitiveness. I think, future expansion will strictly follow a prudent sales strategy. We begin by validating the profitability of a single store and brand impact model using operational data from our initial stores. Once we successfully validate the business model, we will consider to speed the process of replication. This way ensures very -- every new store becomes a valuable brand asset that keeps generating value over time. That's my answer. Operator: The next question will come from Yichen Zhang with CITIC. Yichen Zhang: And my question is regarding our overseas market. Because we know that Pop Mart's overseas business almost contributed half of its revenue. But for now, our current overseas revenue proportion is relatively low. So, will the overseas market be our focus for the next year? And what is our strategy on the overseas market? Dong Xie: Thank you for your question. Regarding the overseas market, I think that definitely is our -- one of our focuses, especially starting from recently in this quarter. I think because of the supply chain shortage in the first half year, we are -- our major resources are put into the domestic market, because we are still at early stage and also we are -- we should supply all of the demand -- order demand from the existing clients in the domestic market, especially the KAs first. But as -- at the same time, we are increasing our capacity, the production capacity, especially recently, as I just mentioned, we have increased the monthly capacity almost 40x recently of the -- compared to that early this year. So, we started to make our efforts in terms of the overseas channel and sales. So starting from this quarter, we will adopt such a strategy that, first, we will cooperate closely with our KAs, with our distribution partners, especially with that who has very solid overseas chain stores and distribution network. And then at the same time, we are building our overseas online platforms such as TikTok in North America and Southeast Asia at the same time. So, I think combining both of these efforts, we will make progress in terms of the overseas sales in this -- in the coming quarters. But I think as we -- even though we definitely think that the overseas market is growing very fast compared in terms of the speed, the growth rate with the domestic market. But as this -- overall, we are still at the early stage and our absolute sales volume is still growing very fast. I think to -- the majority of our sales will still come from the domestic market in the short term. Definitely, we will replicate the strength and experiences built in the domestic market to the overseas market. So, everything is at the beginning and on a trajectory trend so that we can make big progress in the coming quarters. Yes. Operator: The next question will come from [ Dai Xu ] with Huatai Securities. Unknown Analyst: I'm Dai Xi from Huatai Securities. My question is about our IP structure. So, I wonder what is the revenue structure breakdown by IP this year? And how do we foresee the drivers from new IPs in the next year? Dong Xie: Based on this quarter data, our total business shows a healthy and well-structured IP portfolio. We ranked our IPs according to the popularity and also the IP strength. First, in this quarter, the total revenue for the quarter was RMB 127 million. Our super hit product and IP, WAKUKU alone accounted for 71% of our total revenue. And this makes it the key driver for our growth. Our classic IP, ZIYULI, as a stable pillar contributed 16% of the total revenue approximately. And the new IP, which we launched in July, and it is the third-party licensed exclusively licensed IP called SIINONO, made a solid debut, accounting for approximately 10% of our revenue this quarter, demonstrating a remarkable performance. And the remaining coming from -- came from other IPs because we currently have 70 IPs. So, for this result, I will give you some basic principles. First is that we will focus our efforts, all of our efforts, the majority of our efforts and resources on our class IPs, that is WAKUKU, ZIYULI and SIINONO, currently. I think in the short term, maybe in the coming quarters and maybe 3 -- around 3 years, we will focus on the top IPs, because we think the IP should -- we should put efforts to make the top IP to last their popularity. Looking ahead to the next year, our new IP strategy will be driven by a dual approach, deep in the core and systematic incubation. So our core engine, WAKUKU will transition from that explosive launch momentum to deeper operations and extending its product life cycle. We will consolidate our market-leading position through strategic product line expansion and enhanced user experience. And also, we will systematically replicate SIINONO's proven incubation model to cultivate one to two additional flagship IPs, creating a more balanced and diversified growth portfolio. So overall, our company will drive future growth through an IP matrix operating model. This breaks down into two main areas. And we -- first, we will refresh our established IPs to keep them fresh and engaging for our audiences. Second, we will set up a flexible incubation mechanism that allows us to continually test new concepts and strategically allocate resources to the most promising emerging IPs. Over time, this approach will help us create a healthy IP ecosystem, one that appeals to diverse audiences, protect us from single product risk and also deliver long-term growth potential. But quarter-by-quarter, I think the IP revenue fluctuation will be based on the product launches and the pace of the product -- each IP. So, I think in a sum, we will focus on three to five key IPs such as WAKUKU, SIINONO, ZIYULI, and other IPs maybe in the future. And also, we will incubate some new IPs so that we can not only diversify the revenue concentration risks, but also to grow the whole IP portfolio. Thank you. Operator: As there are no further questions, I'd like to hand the conference back over to management for closing remarks. Please go ahead. Leah Guo: Thank you again for joining our call today. If you have any further questions, please feel free to contact us or submit a request through our IR website. We look forward to speaking with everyone in our next call. Have a good day. Operator: The conference has now concluded. Thank you for your participation. You may now have a good day.
James O'Shaughnessy: Good morning, and [Foreign Language]. We're happy to welcome you here today for Inditex' 9 Month 2025 Results Presentation. I'm James O'Shaughnessy, Investor Relations. The presentation today will be chaired by our CEO, Oscar Garcia Maceiras. As well as Oscar, we also have Andrés Sánchez, our CFO; and Gorka García-Tapia, Director of Investor Relations. Following this presentation, we will open the floor to a question-and-answer session, starting with the questions received on the phone and we'll then proceed to the webcast platform. Let's take the disclaimer as read. Oscar. Oscar Maceiras: Good morning, and welcome to our results presentation. Thank you for joining us today. In the 9 months of 2025, we have generated a strong performance with sales growth in a complex market environment, while maintaining very satisfactory levels of profitability. This is all down to the consistent and strong execution of the group. Our high levels of diversification have underlined the resilience of our business model. This performance, as always, comes from the 4 key sources of strength that we have, our unique fashion proposition, our increasingly optimized customer experience, our focus on sustainability and the quality and commitment of our people. Our differentiation in the market is as a result of these factors. As you have already seen, our autumn/winter collections have been well received by customers. Andrés will provide some color on the third quarter results shortly. In the 9 months of 2025, sales in constant currency increased by 6.2%. This satisfactory growth rate extended to both stores and online. Sales were positive across each of the concepts and in constant currency across all geographies. In the 9 months of 2025, sales grew by 2.7% to reach EUR 28.2 billion. It's clear to see from the figures we have released this morning that good execution of the model has permitted us to generate both an excellent gross margin and also to exhibit disciplined cost control. Profit before tax increased by 3.6% to EUR 6 billion. At the bottom line, net income increased by 3.9%, to EUR 4.6 billion. This strong performance has continued into the fourth quarter. Store and online sales in constant currency between the 1st of November and the 1st of December grew by 10.6%. Between the 1st of November and the 24th of November, the sales growth in constant currency was 9%. Our presence across 214 markets in conjunction with low market penetration in almost all of these countries supports our diversification. We continue to enjoy significant global growth opportunities. This confidence comes from the fact that we have a unique model that permits us to build up on the increasing levels of differentiation. And now let's pass over to Andres, who will cover the numbers. Andrés Sánchez Iglesias: Thanks, Oscar. Before turning to our 9-month figures, I would like to briefly comment on the performance over the third quarter. As you can see, sales grew at 4.9%, impacted by about 350 basis points of currency headwinds. Gross margin expanded 79 basis points, primarily driven by a strong execution of the business model. Playing a lesser role, but worth mentioning in anyway, we also had the negative currency impact on sales, as I mentioned previously, as well as a favorable U.S. dollar tailwind from our sourcing. OpEx in the period has been tightly controlled, growing 3%. Net profit rose 9%. Moving on to the 9-month figures now. You can see from the results released earlier this morning, and I hope you will agree with me that our performance as a company has been exemplary. In the face of substantial currency headwinds, our sales performance was robust at plus 2.7%. As a consequence of the disciplined management of operating expenses over the period, we can see a meaningful amount of operating leverage. There is no structural change taking place here. This is purely a result of good execution and a good example of the flexibility of the business model. EBITDA advanced 4.2% to reach EUR 8.3 billion, while PBT increased 3.6% to EUR 6 billion, resulting in a PBT margin of 21.2%. Net income increased nicely at 3.9% to EUR 4.6 billion. The sales line has progressed well at plus 2.7% and has reached EUR 28.2 billion. In constant currency, that is sales growth of 6.2%. You will note that the third quarter saw the strongest sales growth for the year so far, offset by a negative currency impact, as I mentioned previously. Sales growth has been strong both in stores and online. Furthermore, sales growth was positive across all concepts and in constant currency in all geographies. At current exchange rates, the company reiterates its expectation of around minus 4% top line currency impact in the full year 2025. Over the first 9 months of 2025, the gross profit increased 3.2% to EUR 16.8 billion. The best explanation for this, as Oscar alluded to a few moments ago, is the successful execution of the business model over the period. The gross margin reached 59.7%. We reiterate our stable gross margin guidance for the full year 2025, perhaps with a slight bias to the positive side of the usual range we provide. Over the 9-month trading period, we've been able to closely monitor and control operating expenses across all departments and business areas. The accounts show 29 basis points of operating leverage for the 9 months. Taking into account all these charges, operating expenses grew 33 basis points below sales growth. In fact, on a stand-alone basis, Q3 also saw operating leverage of 187 basis points. Our structural negative operating working capital comes as a result of our model. As per usual, the evolution of operating working capital is aligned with the performance of the business over the period. We consider the quality of the closing inventory to be high. The net cash position was EUR 11.3 billion at the end of the period. And now Gorka, over to you. Gorka Yturriaga: Thanks, Andres. Over the 9 months of 2025, the sales performance of the group has been remarkable. Perhaps one could say back-end weighted in terms of sales performance over the whole 9 months, but there is no doubt that the execution and commercial discipline has been good throughout as is reflected by the integrity of the P&L over the period. This strong performance was consistent across all concepts. We're happy with the execution of the model over the period. Our global store expansion plan continues. In the 9 months, we opened stores across 39 markets all across the globe. This quarter, Bershka entered Denmark with its first store in Copenhagen. Oysho continues with its European expansion. After opening its first store in Amsterdam in September, it is opening its second store in Germany and Berlin, a market where it has been performing strongly online. The execution of the concepts have been highly satisfactory. Store sales have been strong. Online sales have been great. So all around an excellent performance. Let's stop for a few moments just to bring out an aspect of our business that sometimes passes people by, our diversification. Whether you're talking about diversification by number of concepts or by channel, online versus stores or by geography, as we've already mentioned, we have online presence in 214 markets, 97 markets if you're talking about physical stores. We're a company that enjoys a very broad level of diversification. We also have over 70 independent design teams across our 8 concepts looking to capture and react to fashion trends. Even if we're referring to diversification by sourcing markets, we source from over 50 different markets. This diversification has added an extra layer of resilience to our business model, as has been evidenced throughout this year. And now back to you, Oscar. Oscar Maceiras: Thank you, Gorka. One of our goals is to continually strengthen the key elements that are at the heart of today's results. Our priority remains to continually increase the appeal of our fashion proposition. Creativity, innovation, design and quality at defining features of our collections and a key focus. As Gorka has just highlighted, we have more than 70 design teams across 8 concepts. All of them apply a meticulous design process that impacts every detail of our garments and collections, while striving to provide the latest quality fashion to customers around the world. The results of this unique approach can be clearly seen in the collections we offer every season and our rapid response to customer demands. We continue generating a very broad range of fashion propositions for each of our differentiated concepts. The focus on an ever more enhanced customer experience includes the continuous process of upgrading stores with strong architectural features and with highly curated internal spaces. One of the recent flagship projects has been the relocation of the Zara store in Osaka Shinsaibashi with a special Zacaffe on the top floor. With around 2,000 square meters across 4 floors, the new store combines Japanese tradition and contemporary design. Similar to other projects in different countries, the existing Zara store nearby will become a stand-alone Zara Man store. Since Zara arrived in the country in 1998 with its first store in Shibuya, Tokyo, it has improved our commercial presence today reaching 64 stores spread throughout Japan. We continue to see many opportunities to improve our presence in the world's prime locations as well as expanding to new cities and new territories. We continue innovating in how we enhance the customer experience. An example of this is our recently opened store in Diagonal Barcelona after a refurbishment designed in collaboration with Vincent Van Duysen. The store showcases our collections in a very unique and curated way. This week, we are opening a Zara Man stand-alone store in Palazzo Verospi, Rome as well as our store in Charlotte, North Carolina, expanding to our 26th state in the United States. For that same market, in October, we opened a new store in Las Vegas Forum Shops at Ceasars Palace. Of course, the improvement of our customer experience is also fostered, thanks to our use of technology. As you know, in 2025, we are rolling out the new security technology in the concepts beginning with Bershka and Pull&Bear. The implementation was completed in Zara in 2024, and the feedback in the first full year of operation has been very positive. On the occasion of its 50th anniversary, Zara has presented the capsule collection 50 Creators, a solidarity project that brings together 50 professionals from different creative fields. Zara will donate all profits to the Women's Earth Alliance, an organization that promotes female leadership in environmental and community initiatives. On the 18th of November, the opening of the new Zara Home for&from store in Porto was celebrated. With it, the group reaches a total of 17 stores of this format that since 2002 have generated job opportunities in Spain, Portugal, Italy and Mexico for almost 1,000 people with different disabilities in collaboration with local NGOs. In terms of Inditex's potential for long-term growth, in the current year, we are executing investments that are scaling up our capabilities and generating efficiencies that are being reinvested back into the business, increasing our competitive differentiation. The growth of annual gross space in the period 2025 to 2026 is expected to be around 5%. Over this time frame, Inditex expects net space to be positive, of course, in conjunction with strong online sales. We operate in 214 markets. In the vast majority of these markets, we have a very low market share of a sector which remains very fragmented. These 2 factors alone help to underpin the strong growth opportunities we see ahead of us. For 2025, we estimate ordinary capital expenditure of approximately EUR 1.8 billion. We continue to focus the ordinary capital expenditure on our global store base, the online platform and the rollout of technology programs aimed at enhancing the level of integration. In light of our view on Inditex's strong long-term growth opportunities, we have been rolling out the logistics expansion plan. This 2-year extraordinary investment program focusing on the expansion of the business allocates EUR 900 million per year to increase logistic capacities in each of the 2024 and 2025 financial years. In October of this year, the new building for Zara in Arteixo, A Coruña was inaugurated. This building is over 200,000 square meters in size and houses the product department teams for Zara Woman and Zara Kids with sustainability and technology as relevant features of this new space. A brief note on dividends. The final dividend payment for 2024 of EUR 0.84 per share was made on the 3rd of November. I would like to leave you with a brief comment on our current trading. Our autumn/winter collections have been well received by customers. Store and online sales in constant currency between the 1st of November and the 1st of December 2025 increased 10.6%. Between the 1st of November and the 24th of November, the sales growth in constant currency was 9%. Thanks to everyone for taking part in our presentation this morning. That's it for today. We will be happy to answer any questions you have. James O'Shaughnessy: [Operator Instructions] The first question goes to Monique Pollard from Citi. Monique Pollard: I was just interested in understanding from you, latest press reports are suggesting that the EU are planning to bring forward the legislation, which will remove duties exemptions on low-value parcels, the de minimis rules and whether you think that would remove some competitive pressure going into 2026 and 2027, please? Gorka Yturriaga: Thank you, Monique. Thank you for your question. First of all, I'm going to keep my comments focused on Inditex rather than speak of the competitive landscape or any other competitors that you're referring to. You know that we don't use the de minimis rules in the way that we operate. We're focused on identifying the trends in the market, reacting as quick as possible. The business model that we're doing has been executing quite strong throughout this quarter. And as you've seen, we've come out at the beginning of quarter 4 with a strong trading update as well. James O'Shaughnessy: The next question comes from Geoff Lowery from Redburn. Geoff Lowery: Could you talk a little bit more about your step change in logistics infrastructure, in particular, what you think it can do for you in terms of future capacity, operating efficiency and how quickly you expect to really sort of bring it into full use. Gorka Yturriaga: Great. Thank you, Geoff. I mean we're talking about logistics capacities, and you know the 2-year extraordinary CapEx program that we have, EUR 1.8 billion for the 2 years that we've been investing that we're going to be finishing up at the end of this year. We've mentioned during the presentation that this program is on track. You know that Zaragoza II, one of the major logistics centers that we've been talking about is now up and running, and we're just at the beginning of that ramp-up stage. Remember that the purpose of this logistics plan was to capture the future growth that we're seeing. And I think that in a way with the results today, you're really seeing reflected the growth that we're talking about for future. Thank you. James O'Shaughnessy: The next question today comes from Warwick Okines from BNP Exane. Alexander Richard Okines: You've talked a bit about operating leverage on the call. And you also talked about wanting to reinvest the benefits of efficiency. Do you think it's reasonable to assume that your staff costs grow more slowly than sales in the future? Andrés Sánchez Iglesias: Thank you. In 9 months, as you have seen from our release, our OpEx grew slightly below sales, 29 basis points. If you look in Q3, that growth was even lower with an operating leverage of 187 basis points. As you see, those figures demonstrate the flexibility of our business model and the variable component of our OpEx line. As a reminder, you have to take into account that personnel costs and rental expenses, 2 of the main elements of this line are highly variable linked to the sales performance. So as we mentioned, there is no structural change here. This is a purely result of good execution and a good example of the flexibility of the business model. In any case, operating margins over the medium to long term are expected to be stable with a focus on driving demand for our products by executing the business model successfully in order to continue to generate highly fashionable collections and therefore, maximizing sales at full price. Thank you. James O'Shaughnessy: The next question comes from Anne Critchlow from Berenberg. Anne Critchlow: My question is on the EBIT margin, which reached above 24% in the third quarter. So just wondering if there's a level above which you would not want to see the margin progress, but rather invest back into the customer proposition. Andrés Sánchez Iglesias: Thank you. We have seen positive evolution throughout the year so far. So in this sense, growth in 9 months was plus 6.2% in constant currency, with sales growth of plus 8.4% in Q3. So despite the significant impact on the supply chains and currency markets, our gross margin has remained broadly stable as a consequence of the consistent strong execution of our business model that continues allowing us to maximize full price sales and achieving this gross margin performance. For this upcoming year, 2025, we reiterate our stable gross margin guidance. However, given the current trends, as we repeated, we are likely to be slightly positive within the range. Regarding OpEx in 9 months, and as we repeated, so we have a very flexible structure in terms of costs. So there is no changes here. It's a pure good execution and a good example of the flexibility of the business model, but we continue expecting operating margin to be stable over the medium to long term. Thank you. James O'Shaughnessy: The next question comes from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: I guess if I can just get you to comment on the U.S., please. What price adjustments have you made in the U.S., what customer response have you seen and what are your thoughts on the potential for expansion in the midterm here? Has anything changed? Oscar Maceiras: Thanks for the question. Well, we have mentioned several times in previous calls, U.S. is a very relevant market for us, and we continue to see opportunities to keep on executing our strategy of selective growth in that market. We should bear in mind that despite good results, we have a low market share, and we believe that growth is in our hands, not dependent on the performance of the broader market. 2025 has been a year full of relevant projects for us. Some examples have been the opening of our new flagship stores in L.A., The Grove, the recent opening of our store in Las Vegas Forum Shops at Ceasars Palace. As we mentioned during the presentation, this week, we are arriving at our 26th state with the opening of our store in Charlotte, North Carolina, and also, this same week, we are reopening after an important refurbishment, our store in Newbury Street in Boston City Center. 2026, we will be also full of new exciting projects the opening of our flagship store in 400 Post Street in San Francisco, an important refurbishment of our iconic Zara store in Fifth Avenue in New York and also, we can confirm that Bershka after a successful online performance in the U.S. will open in 2026, its first 2 stores in Miami area. James O'Shaughnessy: The next question goes to James Grzinic from Jefferies. James Grzinic: Really a factual question. I think you told us back in Q1 that the percentage of in-store data sales that were going through self-checkouts were around 30%. Can we have an update on what that number has reached now? That would be very helpful. Gorka Yturriaga: Great. So I think you're right. We're talking about assisted checkouts, which have been implemented throughout the group. Remember that this is also in conjunction with soft tags, as the soft tag rollout really enhances the use of assisted checkouts for obvious reasons. And as this progresses throughout the year and the next year with the new concepts of Bershka and Pull&Bear that we're rolling soft tags out, I think that this is going to have an increasing impact. The percentage of sales process through ACOs has been progressing nicely since we last spoke. I think what I can tell you at this stage, at least, is that in some of the larger flagship stores that really drive a lot of traffic, where you would think that these ACOs really should be coming in, in terms of usage, we're seeing close to 90% of total transactions in some of those stores. Thank you. James O'Shaughnessy: The next question comes from Georgina Johanan from JPMorgan. Georgina Johanan: I just wanted to ask a question on AI, and I appreciate it's sort of quite a high level at the moment. But how are you using AI in the business already in terms of driving efficiencies, but also thinking about ways to sort of support the consumer performance from here? And just any thoughts on how that would sort of develop over the coming 12 months would be really helpful, please. Gorka Yturriaga: Sure. So I think you know that we've been historically a company that's really been data-driven for many years. We're trying to capture the trends in the market, reacting real time and adjusting our product offering through the in-season sourcing that we do in order to provide these trends into the market and capture that full price sales. What I would say initially with regards to AI, I think we're at a very incipient moment of artificial intelligence. And what we see at this stage is that AI is a tool that can really empower our people, but not really substitute them, right? There are a series of different things that we're doing, both on the web page with regards to, for example, concept searches, which is, I think, is a novel idea with regards to how you find a product on our web page. And of course, you can imagine in some of the back office functions, AI is really a great tool to go through contracts of different sorts and pull out interesting information. I hope that's helpful. James O'Shaughnessy: We're going to proceed with the webcast questions now. We've had a few today. The first of which is, can you comment on why you took the decision to give a short trading update, please? Gorka Yturriaga: Sure. So before I answer this question, maybe I'd just highlight the fact that in this particular quarter, it is a relatively short period. So we're talking about the 1st of November to the 1st of December. So for the rest of the year, we still have 2 whole months left. Secondly, you've seen that in the third quarter, we had constant currency sales of about 8.4%, and that's really still coming through in the trading update that we've provided of 10.6%, showing that we've started the fourth quarter well. We've also provided that 1st of November to 24th of November with a constant currency sales of 9%. And the reason we've provided the shorter period and that 9% is with the purpose of stripping out the last week for obvious reasons, as we think that this is a better reflection of the commercial sentiment our teams are seeing as of today in the market. In any case, I'd highlight that with regards to the last week, there's been no significant change in promotional activity this year, and we're completely focused on the execution of the business model. And to that point, I think we've reiterated throughout the presentation that for 2025, we have -- we're looking at stable gross margin, albeit perhaps with the current trends with a slightly positive range of that range that we normally provide. Thank you. James O'Shaughnessy: The next webcast question relates to the concepts. Bershka, Stradivarius and Oysho are growing very strongly. Are you thinking about expanding these concepts? We've already spoken about the U.S. into perhaps other markets. Oscar Maceiras: Well, thanks for the question. Well, we are happy with the positive performance of Zara and the rest of our concepts. I have already mentioned some projects for 2026 in the states, including the opening of our first Bershka stores in Miami area. And besides, we keep on identifying good opportunities for expansion of our concepts in the rest of the markets. As an example, this year, this 2025 Stradivarius opening its first stores in Austria and Oysho in the Netherlands. We have the advantage of having not only a good knowledge of the different markets at group level, but also the advantage of having a global online presence for all of our concepts. Thank you. James O'Shaughnessy: The next webcast question also relates to the concepts. Can you comment on the growth strategy for Oysho. Growth in H1 for Oysho was 6% reported, the highest of the group. Oscar Maceiras: Well, again, we are seeing good growth opportunities for all of our 8 concepts. In the case of Oysho, that concept has pivoted a few years ago into selling more athleisure and sportswear and developing a very good strategy in terms of creating an Oysho community. The consequence has been a very positive performance that is also consistent with the expansion to new countries. And we mentioned during the presentation that -- well, Oysho not only entering the Netherlands with its first store in Amsterdam, but also has just opened its second store in Germany in Berlin. So many good opportunities to keep on growing in the future. James O'Shaughnessy: The next webcast question. Inditex continues to experience good growth. Does this give you more confidence in your recent investments into stores and logistics? Oscar Maceiras: Well, the growth that we have seen in recent years is driven by the good execution of our teams, our -- what we consider a unique business model and also a culture of investing to maintain the differentiation. We have to talk to you about investing in our retail optimization program for many years, building unique retail spaces that allows us to enhance the customer experience. Our stores in Osaka Shinsaibashi and Barcelona Diagonal, just to provide you 2 examples mentioned during our presentation, reflect this approach. And we also continue to invest in store technology, including assisted checkout, as has been covered a question by Gorka with very positive feedback from customers. What we see is that these investments, together with the fashion proposition, are driving growth. And our 2-year logistics extraordinary investment plan is also consistent with this view about the potential future growth of the group. So I guess that you should expect us to continue to invest in the business in order to keep on capturing new growth opportunities. James O'Shaughnessy: Thank you. That concludes the webcast questions for today. Oscar Maceiras: Well, thank you to all of those participating in the presentation today. For any additional questions you may have, please get in touch with our Investor Relations department and we will welcome you back in March for the full year 2025 results.
Andrew Edmond: Right. Okay. Welcome, everybody, again. We're going to hear very shortly about Impax' full year results for the period up to the end of September. I'm just going to go through a few admin points. First of all, this presentation is being recorded, so you will be able to watch it again and you'll also be able to see the slides that are presented by the management. There will be a feedback form to the audience after the event, which both ourselves and the management would be very grateful if you can take just a minute or two to share your thoughts on that. For those of you not familiar with Zoom, you will see in the options button under more and then Q&A.. An obvious place to please write your questions and we should have plenty of time to go through those at the end of the formal presentation. On which we're very delighted to be joined again by CFO, Karen Cockburn; and Ian Simm, who is the CEO and of course, the founder of Impax Asset Management, and I am now going to pass over to Ian to commence the presentation. Ian Simm: Okay. Andy. So without further ado, just straight into the agenda. So three things to cover, I don't think we need to get through the appendices, but I'm going to give a quick summary. Karen will then cover the financials, and then I'll come back with a brief summary of the outlook. So many of you perhaps have not met us before, but why it Impax asset management? Well, we believe there's an enormous investment opportunity worldwide over the next 5 to 15 years in what we call the transition to a more sustainable economy which essentially is based on a mainstream capitalist idea that consumers are increasingly looking for more efficient, less polluting goods and services and that would cover areas like clean energy, infrastructure, smart materials, food and agriculture and many others beyond that. This is not about ethical investing, it's about thematic or sector-specific opportunities. Impax has been in business since I started the company in 1998, and we've become a global player. We have clients all over the world. Over the last 5 years, we've initially seen a rapid expansion in competition as many of the large branded houses in our area or in the asset management area have decided they wanted to develop and launch products in climate change or related topics, but many of those players have recently retreated in the wake of some challenges, particularly from U.S. regulators around their response to fiduciary duty. Many of them have confused themselves and the market as to whether they're trying to make money or save the world, whereas Impax is very clearly been aiming to make money, but in areas where those investors looking for good environmental outcomes, there is a tangible nonfinancial benefit. So a global player with weakening competition. And crucially, our business strategy is focused on scaling the business. So as you'll see, we have three elements: listed equities, fixed income and private equity, each of which is positioned to be scalable. And we are well on the way to scaling fixed income. We've already scaled listed equities and in private markets, we are well established with the planned scale in the future. And of course, a scaled business model will deliver a rapid growth of returns to shareholders. Next slide, please. So what's behind this transition to a more sustainable economy? Well essentially, it's about disruption, which creates market uncertainty around pricing. So the disruption is coming from technology change, from regulatory change and from changing consumer sentiment in areas like electric vehicles and transportation, in renewable energy, in the rapid growth of infrastructure investment, for example, water supply. The regulations in these areas are changing as rapidly as the technology. And so there's plenty of opportunity around the mispricing of both publicly traded and privately held assets. So these sectors have been transformed. And therefore, there's an opportunity for a specialist manager with significant resources to more insightful research than the average market investor and therefore, to uncover value. So that's basically what we're doing. Next slide. So as Andy said, these are from now on the results for our financial year ended 30th of September 2025, the six elements of the business highlights that I've shown here so it has been a particularly challenging market for investors this year, we don't need to tell you that, but it's been a continued dominance in some parts of the year by the so-called magnificent 7 stocks or AI-related mega cap names in particular. At other times, the market has been quite broad. So timing of those changes has been quite challenging. We -- after a period of rapid growth in the 2019 to 2022 period, we have outflows to negative, but the net outflows are initially quite significant -- at the start of this financial year have become significantly improved in the second half. As I'll show in a moment, the valuation of the main equity strategies that we're running has become quite compelling. So this does represent an attractive buying opportunity. Meanwhile, from a broader perspective, as we seek to develop further scale and opportunities to build the business further, we're making quite significant progress, particularly with the acquisition of SKY Harbor, a unit focused on high-yield investment management in the fixed income space. Meanwhile, we've been increasingly focused on efficiency in our business operations and we've reduced our cost base, but not in sacrificing our ability to grow or our financial strength. So the business remains very strong with a very material balance sheet such that we've been able to announce and we're nearly completed with a GBP 10 million share buyback program. Next slide. So Karen will cover the financial highlights in a moment, so I won't steal her thunder, but if you eyeball these numbers and compare them to the smaller numbers below FY 2024, you'll see that things have generally retreated, and that's on the back of the outflows that I just mentioned. So I'll come back to the details, but still healthy results in absolute terms, but less than they were the previous financial year. So the market has been challenging. I think the backdrop here is that consumer confidence has been fragile and is probably weakening, particularly in the U.S., and that's been precipitated by the tariff interventions, geopolitical tensions and the consequences for inflation, not least of which concerns about government debt. So we're not definitely heading into a downtown or recession, but over the last 6, 9 months or so, there's been concern about that fragility. And so that has really caused institutional investors to be cautious while at the same time, retail investors are seemingly ignoring those signs and continuing to plow our money into the stock market. A lot of the asset owners in the world are looking back at the last three years, seeing that the very, very narrow market with the AI stocks dominating as -- caused a problem for active management and say there's an increasing interest in the non-actively managed or so-called systematic strategies where Impax does have quite a nice established base. Meanwhile, fixed income markets have been pretty well positioned this year, but the relatively tight spread, particularly compensation for risk premium is holding everyone back at the moment. And in private markets, there's a huge amount of capital chasing the larger deals but Impax is playing in the small to midsize area where there's still plenty of value to be harnessed. Next slide. So I'm afraid in this presentation, there's a couple of very busy slides. This is the first of them and best to look at this in 4 quadrants. So water in the top left, leaders, specialists and global opportunities are our 4 largest sources of revenue in terms of investment strategies. And in each of the quadrants, there's a pair of bars for each of the last 5 years, the dark blue bar is the return in the year from the Impax strategy compared to the all Country World Index in yellow. So if you look at the right-hand end of each of the quadrants, you can see that in 2021, we outperformed the market. But in each of these strategies for the last four years, we have not kept pace the market. And that's been accompanied by -- or driven by a significant derating and the bursting of the valuation metrics that we've seen back in 2021. So we do feel that we're at the bottom of the cycle at the moment because we are tilted towards certain areas of economy, then it's very common as we've seen on a couple of occasions, probably three occasions in the last 27 years that we are out of favor relative to the main market for a period and then we come back into favor. So we are long a return to being in favor. And I think the catalyst for that return are starting to appear. It's probably a little bit too early to announce that we're definitely out of the woods. Hopefully, that will materialize in the new year. Next slide. So on this valuation point, just some data around 2 of those 4 strategies I referred to, water and specialists. This is a -- in each case, a 5-year comparison between September '20 and September 2025 of something that's called the PEG ratio or price earnings to growth so that the ratio of price earnings, which is a metric of valuation divided by the growth rate. So a high number here means quite expensive, a low number quite cheap. So the dark blue, again, Impax' strategy against the Country World Index benchmark in yellow. So September 2020, we were trading at a premium in both of these strategies, and now we're trading at a notable discount. So this is what I was referring to earlier about the compelling nature of the valuations now relative to where we were 4 or 5 years ago. Next slide. So same busy slide, but this time for fixed income, same quadrant arrangement this time for our 4 major fixed income strategies. The top left is the one we just picked up with the acquisition of SKY Harbor, which just closed first of April this year. And the bottom right, global high yield is the strategy we picked up last year 2024 from the acquisition of Absalon Capital Management in Denmark. And then the other two strategies are the fixed income strategy we've had since 2018 when we bought Pax World management in the United States. So if you do the same comparison blue bar against yellow bar for each of the years, then you can see that, broadly speaking, the fixed income strategies are either ahead of benchmark or not too far behind. So this is a much more robust area where the underperformance or outperformance is much less pronounced, much less cyclical, but this is what clients really want something which is a bit more reliable with lower probability of deviation. So these strategies are actually quite nicely positioned, and we've got a very good pipeline in this area. Next slide. I'm afraid that I'm just [ trotting ] through a set of slides that we present on a semiannual basis. So if you're not that interested in the numbers, apologies, this is how we put everything together, but I'll just keep going. So what this does is it shows the bridge on -- from the left, which is our assets under management in GBP 1 billion at the end of 2024, financial year 2024. So that's GBP 37.2 billion through the half year period or half year point rather in green, GBP 25.3 billion to the end of September, GBP 26.1 billion. So this is the bridge shape. So I'm sure if you followed us for a year, you'll have heard the press news about us losing a mandate from St. James's Place announced back in December, and this actually landed in February, so that was GBP 6.2 billion of asset under management reduction. And then the outflows and inflows in the first half were negative about GBP 4 billion offset by some market movement -- or sorry, first half was compounded by some market movement down. And then in the second half, the net flows were GBP 2.7 billion, so a significant improvement in the second half. We got the acquired assets from SKY Harbor acquisition and then markets were positive in the second half. So as you can see, comparing the green, blue and yellow, we had a particularly significant drop in the first half of the year and then a slight increase net-net in the second half. So I think that does point to a stabilization of the business. Next slide. This is a breakdown of our assets under management and revenue. So the first two columns shown in the blue bars, the Impax financial year end position. And the yellow bar this time is our position a year earlier. So starting with the left-hand column, our thematic equities represented 64% of our asset under management at the end of September 25, up slightly, core equity is down because that's where the St. James's Place mandate dropped from. I'm not going to read out all these numbers, but I hope you get the idea. So the regional breakdown in the middle shows that the EMEA region and North America region were down moderately, but the U.K. was down considerably as a percentage -- sorry, the North American and EMEA was up slightly, but that was because the U.K. was down considerably as a result of the St. James's Place mandate loss. And then by product type, the revenue is shown again in blue bars. So just worth pointing out the BNP Paribas mutual funds, which remains our largest aggregate client, 25% of revenue coming from them. Just stable compared to 12 months earlier. Next slide. And the movement inflows or assets under management, this is in GBP 1 millions. But basically, if you divide by GBP 1,000, you get to GBP 1 billion. So St. James' Place, that's the GBP 6.2 billion outflow. Notable here on this slide is the middle top, which is the significantly reduced outflows from BNP Paribas. So that's encouraging and has continued to decline into the new financial year. And then segregated accounts on the bottom right is actually a Asia Pacific institutional investor that was paying us a very, very low fee and a performance fee. So we're not too disappointed to see that one go. Next slide. So moving on from the numbers to our strategic priorities, of which there are 6. So essentially, we're looking to scale the business in equities, fixed income and then grow private equity. That's the top line. And then the bottom line, build our sales and marketing, all our distribution channels, deepen our partnership with clients and then optimize our operating model. So a little bit more detail on these coming up. Next slide. So starting with listed equities. We are continuing to enhance our investment process, using technology and of course, AI, to which we're doing through a careful set of experiments. We have introduced more structure into our research team. And then in the product area, we are launching our first exchange-traded fund in the United States, which will happen in a couple of months' time, we are expanding our systematic equity product range and we've launched our new emerging markets fund. Next slide. In distribution, there's much more work being done to sell to clients directly in German-speaking Europe, which is DACH, Scandinavia, Benelux and France, and then we have a very good sales colleague in Canada. Through this channel in the Benelux area, we've won a very large segregated mandate, which landed in June. And meanwhile, our Sustainability Center is continuing to provide a differentiated service to clients. I'll come back to that in a moment. The -- in addition to the reduced outflows from BNP Paribas, we have been cultivating further partnerships for distribution in the Asia Pacific region, Latin America and Southern Europe. Meanwhile, our brand continues to resonate globally and as our competitors pull back, as I was saying at the start, then we're seeing an increasing opportunity not just for winning new [indiscernible], but also for winning mandates that clients are wanting to switch from some of these large branded houses that they no longer want to do business with. Next slide. So fixed income, as I mentioned, we completed the acquisition of SKY Harbor in April. We now have 23 investment team members, which is critical mass. That compares to 5 when we bought the Pax business. Client base is now spread nicely over both Europe and the U.S. with an established set of products around those 4 major strategies. We're making very good progress in adviser or consultant endorsements. These are essential for gatekeeping for the major asset owners and we're starting to extend our wealth management profile, not just in the U.S., which we've had for a number of years, but also now in many markets in Europe. So lots to look forward to in fixed income, and I think there's a good chance of a rapidly expanding set of inflows here. Next slide. And then in private equity, for those of you that don't know us in this area, we have been, since 2005, running a series of 10-year funds, we call them limited partnerships, and they are investing in the renewable energy space, particularly backing the developers of renewable energy assets all around Europe. These developers tend to be relatively small companies. They are relatively under-resourced in financial terms, and therefore, they're very happy and keen to do work with a sophisticated and well-capitalized or well-sized fund manager like Impax. So we are making very good progress with exiting our third fund and also deploying our fourth fund. So regulation around what you can say in this area around expansion, but I'll leave you to join the dots about what happens next. So we're making good progress in expanding this business. Meanwhile, the efficiency programs continue to develop because of the drop in assets under management, we've been able to reduce headcount from about [ 320 rolls to 275 ], so that's a drop roughly 15%. Frankly, that did actually reflect an inefficiency in our expansion 2019 to 2022 period when we were growing extremely quickly. And the way that we added roles at that time was probably not optimal. So many of these positions have been eliminated without any loss of capability. So crucially, we've been able to downsize the head count without any reduction in that capability or in our growth potential. And meanwhile, there's plenty of project work underway to improve our efficiency with the broader adoption of technology. That may well lead to further head count reduction in the future, again, without compromising our growth potential. And then as I said, the sustainability center, this essentially is helping our clients in 4 or 5 ways. So we are through the center, enhancing our research, we are coordinating our engagement and stewardship work with underlying companies. We're providing detailed reports to clients around nonfinancial outcomes, and we are helping them with thought leadership information, for example, around physical climate risk and at the same time, working on a collaborative basis with them around the engagement with policymakers so that there can be a financial expertise injection into new market creation and the associated regulations. At which point, I think I'm handing over to Karen. Karen Cockburn: Thank you, Ian, and thank you all for your time this afternoon. I'm just going to take you through those numbers that Ian's flashed in front of you there at the start. But it do reflect that Ian's comments that we find ourselves at the bottom of the cycle and numbers still a healthy profit but do reflect the level of outflow that we have seen this year. So starting with on Monday, we announced then the adjusted operating profit of GBP 33.6 million and the EPS sitting at 21.3. Now both of those numbers down by just over 1/3 from the prior year. And you can see that it's a net reduction of GBP 19 million, and that has come from a GBP 28 million reduction in revenue being offset then by the cost action that Ian referenced by about the savings that we made in year of GBP 9 million. Important, I think, we'll get into in a little more detail that as we did lose some of those larger clients, the actual fee margin, a key measure for the health of the business did improve. Now we finished the year in an operating margin of 23.7% and also finished the year with the balance sheet in very good health with capital and cash surplus. And on the back of that, proposing a dividend of 8p, 12p for the full year, representing a payout of 55.7%, and that's aligned to our dividend policy, a nice set our dividend payout, a sustainable rate. And then we finished a busy year also with a buyback, our first-ever buyback, which I'm happy to say is well on track for completion for the end of the calendar year. So the next slide looks at the revenue in a little more detail that sort of just unpacks that sort of reduction that we saw in the year, but it's predominantly driven by the reduction in the AUM. Based on Ian's slide, if you recall, that started the year at GBP 37 billion, but finished at GBP 26 billion. The average is for the two years are the ones that really drive sort of the revenue calculations and you can see that they have dropped reflecting that outflow. So just looking at the bridge, you can see the significant drop in the income year-on-year was this level of outflow and you can see SJP being the largest contributor to that. Now that was offset by favorable market movement and then the impact of the acquisitions as we build out our fixed income capability that took the full year to GBP 141.9 million. Now looking at asset management, it's usually important just to see where we are today. And there's a figure in the circle at the bottom of GBP 126.1 million. We call that the run rate, which is where we find ourselves and September times 12. Now what that figure reflects, it's important to sort of say the level of outflow that we had, 80% of it happened in the first half of the year. So the business has been in a very stable position of GBP 26 billion plus or minus a little for the last 6 months. And that's the position that we look for -- that we would like to retain before we push on for growth. In terms of looking at sort of where we think a number like that, I know you all have models and how that might outturn for the year. The guidance that we gave to the broad analyst community of which equity development takes part in our consensus is really very conservative that it's difficult to call when we expect sort of the growth to return, but we have many reasons to be optimistic as we talk there about the fixed income opportunity systematic and the ETF that we're very active in terms of new product. But I'm being very conservative in terms of where I see that coming in. So I expect the revenue to be a figure still beginning with a 1, maybe with a 3 at some point in the next 12 months. Now a really key component of looking at the AUM then is the average fee margin, which you saw increased to 46.9 in the year. Now that is the fee that's made up of over 80 clients and about 90% of that -- 95%, it comes from our listed equity business. And then about 10% of our business is this fixed income. So a combination of those as we grow forward, I expect to see sort of that run rate margin of 48.4 basis points come down slowly over time as we do grow that fixed income business. But that is a very healthy, well diversified supported by 80 clients margin and a sign, I think, of the underlying strength of the business. I then move on to look at costs on the back of that outflow that we had with a very active cost management program and the 45 people left the business. You can see in the bridge that the two orange blocks that we talk there are really staff related, so 45 people resulted in GBP 5.6 million saving in the year. On average, they left maybe 6, 7 months into the year. So that will gross up to over an GBP 11 million saving as we move into the new year. For those that follow us, a very important policy that we have is the level of variable staff cost. That's the bonus pool. We align that very closely to investor interest in that the policy is to pay out no more than 45% of the pre-bonus profits in the form of bonus. So what that means is that with that adjusted profit, the reduced profitability coming through, and it is the simple mathematics of that takes that into a saving, but the key point being very aligned. So a significant cost reduction in the business. And then we continue to invest -- whilst removing costs, we will continue to invest in the areas where we do see the opportunity for growth, and that's where you see the cost base build back up marginally, the acquisition of SKY Harbor bringing in additional cost and also then sort of just the regular inflation view. But where we finish the year is that whilst the cost across that bridge dropped by GBP 9 million, the two figures at the bottom of the table show you the actual run rate cost of the business reduced by GBP 20 million, so we have been able to respond to quite a significant amount of the AUM and flow loss that we've had. Just very quickly, looking down the left-hand side, you can see the head count there that has reduced, 45 heads came out. We did add some further into our fixed income business. We now have 23 investment professionals in our fixed income business. So that's a business ready to scale. And you can see the cost reductions just came broadly out of -- across the whole business rather than any one specific area. So our refined cost base is what we're taking into the new year and then bringing the revenue and the cost together just to look at that operating margin, 23.7. We have enjoyed a number of years previously in the 30s, and we feel confident about getting back into an operating margin of 30% in the medium term. So that's really finishing off on the P&L. Very quickly on the balance sheet, moving on to a couple of slides to say all in very good health. And with health finishing the year with GBP 64.7 million of cash on the balance sheet, significant healthy surplus in that. Key uses of the cash this year, it has reduced and broadly because of the relatively large prior year dividend being paid out of this year's reduced operating earnings. We -- and the acquisition of our own shares, which is the buyback. And also, we continue to buy shares into our EBT to further align our staff to shareholders. and of course, the purchase of SKY Harbor, which happened in April for $6 million roughly that comes out of that figure. So that leaves us with very healthy cash balances and on the back of that paying a dividend yield of 6.9%. Again, a very clearly defined policy that we've had for dividend over a number of years which is to pay out at least 55% of adjusted profit after tax. And this year, we're just -- we're putting this 55.7% to a sustainable rate. Now that level of dividend of 12p for the year plus the buyback, I'll talk about that in a moment. That's putting GBP 25 million, a significant amount of cash back in shareholders' hands over the period. Based on that dividend payout, looking on the next slide, at capital, again, remains with very healthy surplus. There's no debt in the business. We continue to generate capital. It shows we will -- it shows that actually the surplus there in that orange box looks as if it increased in the year. Once we complete the buyback, you'll see that reduce slightly. And then also an important message for me, just like costs where we're invested for growth. Our capital, we also have nearly GBP 17 million in seed capital, where we see growth opportunities. When we're doing this presentation, I think always important to talk about our capital allocation priorities. These have not changed since we updated at the half year when we restated our capital allocation policy. But the real priority right now in this period of volatile earnings is the financial resilience we will seek to pay the sustainable dividend. I mentioned we continue to purchase shares into the EBT. And then there always is the excess that we will carry looking for growth to invest into the business but also seeking to grow by small accretive acquisitions has always been part of the DNA of the organization, and that continues. And then just a page to finish with based on looking at the buyback. Just to confirm, we announced on the 22nd of May, a buyback of GBP 10 million. At the 30th of September, when the accounts, when you read them, you'll see that we had about 1/3 of that completed. We had a very active last couple of months and finish as of the day of the -- on Monday's date of announcement that we had 89% complete of the program. We, therefore, expect to complete that over the coming weeks. Net-net base, give or take a bit on where the share price is, we expect to be canceling up to 4% of the opening share capital on that. EBT. So just to sort of -- we've mentioned that, we continue to buy shares, spending GBP 3.4 million this year. And the EBT holds a significant portion, GBP 5.9 million of the issued share capital of the business. And then I just wanted to call out, we haven't looked at it for a while in these presentations, it's just that the broad shape of the share ownership with BNP being the largest asset holder and also being the largest shareholder of the business with 14%. That has been at that level for quite some time. And then we do seek and hence, why we continue with this EBT -- capital. We're seeking to have employees whether it be to own up to 12% of the issued share capital as well. Of course, we've got the founders in there and the free float. But that's always been a broadly stable set of shareholdings. With that, until our time for questions, I will hand it back to Ian. Thank you. Ian Simm: So just to wrap up on the outlook slide. So look, I think the investment management market is really an interesting juncture. The major asset owners around the world are increasingly looking for specialist investment management service in differentiated areas. So this is where Impax really stands out because for more than a quarter of a century, we've been focused on an area of the economy that is growing in a sort of secular way in the direction of more and more provision of cleaner less polluting goods and services. So there are some political bumps in the road around, for example, U.S. energy policy. But frankly, that's what asset management in the active area is all about. So we're able to navigate these political headwinds very successfully. So our differentiated brand does give a very easy calling card to the world's major asset owners, pension funds and sovereign wealth funds. And we've got a very wide base of such clients already. We also have offices in the U.S., a couple of offices in Asia and throughout Europe. So we're well placed to reach out to other potential clients in this space. The equity business relative to fixed income and private markets still dominates with 90% roughly of our value or our revenue coming from listed equities. And as I'm sure you appreciate, strategically, we are trying to diversify that by growing fixed income and private markets so that the business is less dependent on the equity market cycle. We haven't got that yet because it takes time to diversify. And therefore, we have been exposed in the last 3 or 4 years to that equity market cycle, which is similarly at the bottom, and we're waiting for a recovery. But in the meantime, the AI phenomenon is delaying that as more and more capital chasing the very large AI stocks. So I think the wide expectation in the market is that 2026 will be broader, there'll be less dominance by the major cap tech, AI names. And in that context, we ought to bounce back to outperformance. So the business development and diversification of business will continue. We're not signaling any more acquisitions at the moment, but that's certainly part of our medium-term plan. And in that context, as Karen laid out, we have a very strong balance sheet and ability to fund directly further acquisitions and a brand which asset management teams and boutiques, I think, increasingly find attractive as a potential home. So I will pause there, hand back to Andy. Andrew Edmond: Great. Thank you very much, both of you. Very thorough detail and a very clear presentation. Plenty of questions coming in, so let's go straight into them. Exuberance is a long way of describing the -- some of the flows money in recent years. And it certainly seems to be the case that some clients who put money with Impax have only had a short-term lived interest in sustainable investing. As you mentioned Ian, 27 years, this business has been going. Could you give more of a perspective about how long typical mandates might last on average in recent years or over that period. and give a bit more comfort on the stickiness of institutions who are genuinely interested in investing in this space? Ian Simm: Okay. That was quite a long question. So I think the easy way to address that is to say that there's two types of clients that we've seen recently, the long-term clients that have been with us for 5 to 25 years and then the more recently arrived clients. So I think the more recently arrived clients who've probably been less patient, and many of them came in with a very strong tailwind to the sector in the 2019 to 2021 period. And aggressively, that was pretty much the top of the market. So they're the ones who've experienced the most significant negative impact from the cycle. So as implied by the question, the longer-term clients generally are still with us at scale, as Tara mentioned, there's over 80 clients and that's 80 contracts. So some of those contracts will be with funds with multiple, in some cases, hundreds of underlying clients. What's the outlook for the business in terms of clients? Well, I think there's a very good chance that those longer-term clients will ride out the cycle because they've not lost as much money from -- because they didn't invest in the peak but also probably understand what we're doing better than the more recently arrived ones. But then as I said several times, we do have a great client outreach and client service team all around the world, so we're well placed to win additional business. Andrew Edmond: Very clear. Thank you. Right. You have consistently sought to grow fixed income and private markets to diversify the business. Does the Board have a longer-term target in mind for what might be a more balanced and ideal split between listed equities, fixed income and private markets? Ian Simm: Well, the Board doesn't have a formal target, and there's no statement as to what we're aiming to achieve. But I think if you look at other firms at a slightly bigger scale who do both fixed income and listed equities, then it's not uncommon to have two equally sized divisions. I think the uncertainty really is around private markets, which generally are more difficult to scale and where you need to be very careful about quality because if you don't deliver consistently good returns, then it's almost impossible to grow further. So we do enjoy the market insights and relationship connections for -- in the industry that our private markets team build or offering us, but we're not in a hurry to expand that area as rapidly as we think fixed income will expand. Andrew Edmond: Okay. Just on private markets, we have a question. Would you describe their activities as more VC than PE or the other way around? Ian Simm: Well, these terms tend to be a little bit slippery as I'm sure the questioner knows, the way we describe what we do is value-add infrastructure. So we are looking to get a capital gain by backing the developers of new assets and by putting money into -- from the construction of the new assets and then once the assets are built, we sell them. So that's why there's an infrastructure style, but it's value add in the sense of having a relatively short turnaround time and not owning the assets for yield, which would be a more sort of core or core plus based infrastructure strategy. Andrew Edmond: Okay. And whilst we're checking definitions, we have someone asking if you could just describe in a bit more detail what systematic equities products involve and who are the typical buyers for such products? Ian Simm: Sure. Yes. So one of Impax' strengths is the creation of taxonomies or universes of thematic stocks that fit the criteria, for example, in the water sector, we have a taxonomy of water stocks, water-related stocks or similarly in the food sector. So at the moment, our actively managed strategies, look at those universes and pick stocks through the judgment of the individual fund manager in a systematic equity strategy for, for example, water or food, the human intervention would simply be to check how the computer was doing in performing the same exercise, so computer and systematic would basically pick the stocks by running a very large number of portfolios of different weightings and different stocks and recommend the best one. So then the human intervention is simply to make sure that the output is consistent with the process. So less human intervention, lower tracking error or lower deviation from the benchmark and as a result, probably lower fees to the clients, but an ability to scale very considerably. Andrew Edmond: All very clear. Karen, I think this one might be for you. You mentioned that adjusted operating margins are hopefully going to move back to what have historically been much higher levels. It seems like most of the heavy lifting has been done in cost control. So can you just identify where your confidence is coming from on the other side of the equation is that operational leverage as assets grow? Or is it margins, if you can just elaborate? Karen Cockburn: Yes. So we have been very diligent, I think, this year in cost reduction and we sort of -- I want to say we have the cost base that we believe is the right cost base for the opportunity that's in front of us. So where would the confidence come from is where I'm being cautious. So that's why I say over the medium rather than the short term is the fixed income. They come -- they're large mandates that we've sort of -- we have in place our distribution network. So we have in place and that team of 23 investment professionals. We have a 10-year track record. So our investments have been made in that area that really should be scaled -- that will -- is our main opportunity for scaling. So I think the way I look at it is that we have really refined the cost reductions, what they did was really refined the listed equity cost base. So when that grows again, that will grow without much investment. But the real sort of step change will come from me in the fixed income growth. And the piece that I can't call is just the timing on that, but all the infrastructure is in place to enable that. Andrew Edmond: Yes, makes sense. Geographical question. North America or North American operations provided about 40% of your revenues. Could you give us an indication of the split between America and Canada in that number? And looking ahead, do you think that the sheer scale of the U.S. economy is the bigger opportunity? Or is it perhaps that Canada, which is certainly at the moment, more pro sustainability may prove the more interesting area to invest in? Ian Simm: Well, we've had some distribution in the United States since 2008. In fact, we brought our distribution partner, Pax World management in 2018. And we have, therefore, a very nicely positioned mutual fund platform serving the wealth management and to some degree, the retail market as well as an institutional client service group. In Canada, we have initially used BNP Paribas Asset Management but when they decided to pull out of Canada, we were able to pick up their representative who moved from BNP Paribas to Impax and is currently living in Montreal and doing the same job for us directly now. So we've had business in Canada for probably 15 years. In terms of the relative size of Canada, I think I know the answer, but Karen, do you have the exact number? Karen Cockburn: So I'm going to say North America in total is about GBP 10 billion of our asset. And I'd say somewhere mid-15%, probably Canada, 15% to 20%. Ian Simm: Yes. So that is heavily skewed to the wealth management market through distributors in Ontario and Quebec. A little bit of institutional, but it's mainly wealth. I do think there's very strong potential for that platform to grow because I think Canadian individuals and families are very well disposed towards and interested in the transition to a more sustainable economy. In the United States, I think, clearly, we need to be careful where we market. We do have a very well-established client base with the so-called wire houses, which will be the groups like JPMorgan, Morgan Stanley, Bank of America, Merrill Lynch and to some degree, Raymond James, Wells Fargo. And those represent very scalable relationships. There's also quite strong consultant following for -- amongst U.S. groups like Cambridge Associates who know our strategies very well, and there's a large number of institutional investors, particularly East Coast and West Coast who are still very interested in this area. So as a net or summary of all that, I would say that the North American opportunity is still very attractive in spite of the federal political headwinds and we do have a team of about 110 people in U.S. with one person in Canada who are building on our brand, which has been there since actually 1970s, which was the origins of taxable management. Andrew Edmond: Great. A couple of questions on the BNP channel, which I'll put together. Historically, Ian, I think you've explained that their outflows last year were mostly driven by top-down asset allocation at their end. And there is an additional -- there's a question, is that why it's stabilized in recent months? And an additional question, is it a question of the BNP sales force being more focused on your product and the two may well be linked. Ian Simm: I think that BNP Paribas Asset Management is well known throughout Europe as a money market funds and fixed income specialist with equity funds being a key component, but not as big or is a sort of high prominent, as prominent as those two other asset classes. So as you correctly pointed out, Andy, I've said before that in the last two or three years, BNP has been recommending to its wealth management clients, wealth management sector clients that they have a relatively conservative portfolio. So I think, yes, the fact that the outflows have been dropping does suggest that the central gatekeepers are incrementally more positive about equities and the salespeople are, therefore, proposing that allocation to equities are improved. So the other components in that story is the acquisition by BNP Paribas Investment Management of the counterpart in AXA, so AXA Investment management, which dramatically increases the size of the aggregated team. So we're looking forward to more distribution potential through a much larger platform. Andrew Edmond: Good to hear. And last question, I think, with some providers of asset management services, withdrawing from the sustainable investment area. Has that changed the identity of competitors that you come up against in tenders in recent months. Do they still tend to be firms with global reach, like yourselves? Or might there be local experts based in the region, be it Asia or America? Ian Simm: Well, if we cast our minds back 5 or 6 years or longer, then there was a group of specialist players with global reach who we would generally come up against. It's probably half a dozen names. And those groups are still around because like Impax, they are focused on not necessarily dedicated to you, but focused on this transition to a more sustainable economy. Around 2019, 2020, as I've mentioned, many of the very large asset managers in the world developed products in this area, and many of them, if not most of them, have actually bought back. So we're left with the same old group of experienced peers. But frankly, no one is as large as Impax in terms of resources. I think we are globally the largest manager dedicated to this area and probably the most diversified client base. So we are well placed to win mandates. And meanwhile, as I've said, the asset owner community is still very interested in what we're doing, albeit some of the pension funds, for example, in the southern part of the U.S. are fearful of coming into the space because of the political backlash. But if you strip that out, then the rest of the market is still very interested in what we're doing. Andrew Edmond: Great. Very good notes on which to finish the Q&A. Thank you to the audience for many questions. Thank you, of course, to our presenters. And Ian, perhaps would you just like to summarize the positive outlook? Ian Simm: Sure. Yes. Well, thanks for joining. Thank you to Equity Development for hosting. I think investment has to be a medium-term game. Otherwise, it becomes impossible to do other things in life. And I think Impax is fantastically positioned for medium-term success given our globally leading brand in an area which is set for further expansion. And the market is overdue a return to a more normal broader structure with less dominance by a handful of names. And in that context, our investment performance should be bouncing back fairly promptly. And when it does, then I think the flows can pick up very quickly. So we also have a good track record of acquisitions. We have a very strong culture management, as Karen says earning around 20% of the business, so very nicely aligned with external investors. So we really value the connection with everybody. Thank you to everybody who's dialed in and particularly those who've dialed in before and are following us. We're always available for one-on-one questions, if there's anything you'd like to address to us directly and look forward to staying in touch. Andrew Edmond: Thank you. Ian Simm: Thanks, Andy. Appreciate it.
Andrew Edmond: Right. Okay. Welcome, everybody, again. We're going to hear very shortly about Impax' full year results for the period up to the end of September. I'm just going to go through a few admin points. First of all, this presentation is being recorded, so you will be able to watch it again and you'll also be able to see the slides that are presented by the management. There will be a feedback form to the audience after the event, which both ourselves and the management would be very grateful if you can take just a minute or two to share your thoughts on that. For those of you not familiar with Zoom, you will see in the options button under more and then Q&A.. An obvious place to please write your questions and we should have plenty of time to go through those at the end of the formal presentation. On which we're very delighted to be joined again by CFO, Karen Cockburn; and Ian Simm, who is the CEO and of course, the founder of Impax Asset Management, and I am now going to pass over to Ian to commence the presentation. Ian Simm: Okay. Andy. So without further ado, just straight into the agenda. So three things to cover, I don't think we need to get through the appendices, but I'm going to give a quick summary. Karen will then cover the financials, and then I'll come back with a brief summary of the outlook. So many of you perhaps have not met us before, but why it Impax asset management? Well, we believe there's an enormous investment opportunity worldwide over the next 5 to 15 years in what we call the transition to a more sustainable economy which essentially is based on a mainstream capitalist idea that consumers are increasingly looking for more efficient, less polluting goods and services and that would cover areas like clean energy, infrastructure, smart materials, food and agriculture and many others beyond that. This is not about ethical investing, it's about thematic or sector-specific opportunities. Impax has been in business since I started the company in 1998, and we've become a global player. We have clients all over the world. Over the last 5 years, we've initially seen a rapid expansion in competition as many of the large branded houses in our area or in the asset management area have decided they wanted to develop and launch products in climate change or related topics, but many of those players have recently retreated in the wake of some challenges, particularly from U.S. regulators around their response to fiduciary duty. Many of them have confused themselves and the market as to whether they're trying to make money or save the world, whereas Impax is very clearly been aiming to make money, but in areas where those investors looking for good environmental outcomes, there is a tangible nonfinancial benefit. So a global player with weakening competition. And crucially, our business strategy is focused on scaling the business. So as you'll see, we have three elements: listed equities, fixed income and private equity, each of which is positioned to be scalable. And we are well on the way to scaling fixed income. We've already scaled listed equities and in private markets, we are well established with the planned scale in the future. And of course, a scaled business model will deliver a rapid growth of returns to shareholders. Next slide, please. So what's behind this transition to a more sustainable economy? Well essentially, it's about disruption, which creates market uncertainty around pricing. So the disruption is coming from technology change, from regulatory change and from changing consumer sentiment in areas like electric vehicles and transportation, in renewable energy, in the rapid growth of infrastructure investment, for example, water supply. The regulations in these areas are changing as rapidly as the technology. And so there's plenty of opportunity around the mispricing of both publicly traded and privately held assets. So these sectors have been transformed. And therefore, there's an opportunity for a specialist manager with significant resources to more insightful research than the average market investor and therefore, to uncover value. So that's basically what we're doing. Next slide. So as Andy said, these are from now on the results for our financial year ended 30th of September 2025, the six elements of the business highlights that I've shown here so it has been a particularly challenging market for investors this year, we don't need to tell you that, but it's been a continued dominance in some parts of the year by the so-called magnificent 7 stocks or AI-related mega cap names in particular. At other times, the market has been quite broad. So timing of those changes has been quite challenging. We -- after a period of rapid growth in the 2019 to 2022 period, we have outflows to negative, but the net outflows are initially quite significant -- at the start of this financial year have become significantly improved in the second half. As I'll show in a moment, the valuation of the main equity strategies that we're running has become quite compelling. So this does represent an attractive buying opportunity. Meanwhile, from a broader perspective, as we seek to develop further scale and opportunities to build the business further, we're making quite significant progress, particularly with the acquisition of SKY Harbor, a unit focused on high-yield investment management in the fixed income space. Meanwhile, we've been increasingly focused on efficiency in our business operations and we've reduced our cost base, but not in sacrificing our ability to grow or our financial strength. So the business remains very strong with a very material balance sheet such that we've been able to announce and we're nearly completed with a GBP 10 million share buyback program. Next slide. So Karen will cover the financial highlights in a moment, so I won't steal her thunder, but if you eyeball these numbers and compare them to the smaller numbers below FY 2024, you'll see that things have generally retreated, and that's on the back of the outflows that I just mentioned. So I'll come back to the details, but still healthy results in absolute terms, but less than they were the previous financial year. So the market has been challenging. I think the backdrop here is that consumer confidence has been fragile and is probably weakening, particularly in the U.S., and that's been precipitated by the tariff interventions, geopolitical tensions and the consequences for inflation, not least of which concerns about government debt. So we're not definitely heading into a downtown or recession, but over the last 6, 9 months or so, there's been concern about that fragility. And so that has really caused institutional investors to be cautious while at the same time, retail investors are seemingly ignoring those signs and continuing to plow our money into the stock market. A lot of the asset owners in the world are looking back at the last three years, seeing that the very, very narrow market with the AI stocks dominating as -- caused a problem for active management and say there's an increasing interest in the non-actively managed or so-called systematic strategies where Impax does have quite a nice established base. Meanwhile, fixed income markets have been pretty well positioned this year, but the relatively tight spread, particularly compensation for risk premium is holding everyone back at the moment. And in private markets, there's a huge amount of capital chasing the larger deals but Impax is playing in the small to midsize area where there's still plenty of value to be harnessed. Next slide. So I'm afraid in this presentation, there's a couple of very busy slides. This is the first of them and best to look at this in 4 quadrants. So water in the top left, leaders, specialists and global opportunities are our 4 largest sources of revenue in terms of investment strategies. And in each of the quadrants, there's a pair of bars for each of the last 5 years, the dark blue bar is the return in the year from the Impax strategy compared to the all Country World Index in yellow. So if you look at the right-hand end of each of the quadrants, you can see that in 2021, we outperformed the market. But in each of these strategies for the last four years, we have not kept pace the market. And that's been accompanied by -- or driven by a significant derating and the bursting of the valuation metrics that we've seen back in 2021. So we do feel that we're at the bottom of the cycle at the moment because we are tilted towards certain areas of economy, then it's very common as we've seen on a couple of occasions, probably three occasions in the last 27 years that we are out of favor relative to the main market for a period and then we come back into favor. So we are long a return to being in favor. And I think the catalyst for that return are starting to appear. It's probably a little bit too early to announce that we're definitely out of the woods. Hopefully, that will materialize in the new year. Next slide. So on this valuation point, just some data around 2 of those 4 strategies I referred to, water and specialists. This is a -- in each case, a 5-year comparison between September '20 and September 2025 of something that's called the PEG ratio or price earnings to growth so that the ratio of price earnings, which is a metric of valuation divided by the growth rate. So a high number here means quite expensive, a low number quite cheap. So the dark blue, again, Impax' strategy against the Country World Index benchmark in yellow. So September 2020, we were trading at a premium in both of these strategies, and now we're trading at a notable discount. So this is what I was referring to earlier about the compelling nature of the valuations now relative to where we were 4 or 5 years ago. Next slide. So same busy slide, but this time for fixed income, same quadrant arrangement this time for our 4 major fixed income strategies. The top left is the one we just picked up with the acquisition of SKY Harbor, which just closed first of April this year. And the bottom right, global high yield is the strategy we picked up last year 2024 from the acquisition of Absalon Capital Management in Denmark. And then the other two strategies are the fixed income strategy we've had since 2018 when we bought Pax World management in the United States. So if you do the same comparison blue bar against yellow bar for each of the years, then you can see that, broadly speaking, the fixed income strategies are either ahead of benchmark or not too far behind. So this is a much more robust area where the underperformance or outperformance is much less pronounced, much less cyclical, but this is what clients really want something which is a bit more reliable with lower probability of deviation. So these strategies are actually quite nicely positioned, and we've got a very good pipeline in this area. Next slide. I'm afraid that I'm just [ trotting ] through a set of slides that we present on a semiannual basis. So if you're not that interested in the numbers, apologies, this is how we put everything together, but I'll just keep going. So what this does is it shows the bridge on -- from the left, which is our assets under management in GBP 1 billion at the end of 2024, financial year 2024. So that's GBP 37.2 billion through the half year period or half year point rather in green, GBP 25.3 billion to the end of September, GBP 26.1 billion. So this is the bridge shape. So I'm sure if you followed us for a year, you'll have heard the press news about us losing a mandate from St. James's Place announced back in December, and this actually landed in February, so that was GBP 6.2 billion of asset under management reduction. And then the outflows and inflows in the first half were negative about GBP 4 billion offset by some market movement -- or sorry, first half was compounded by some market movement down. And then in the second half, the net flows were GBP 2.7 billion, so a significant improvement in the second half. We got the acquired assets from SKY Harbor acquisition and then markets were positive in the second half. So as you can see, comparing the green, blue and yellow, we had a particularly significant drop in the first half of the year and then a slight increase net-net in the second half. So I think that does point to a stabilization of the business. Next slide. This is a breakdown of our assets under management and revenue. So the first two columns shown in the blue bars, the Impax financial year end position. And the yellow bar this time is our position a year earlier. So starting with the left-hand column, our thematic equities represented 64% of our asset under management at the end of September 25, up slightly, core equity is down because that's where the St. James's Place mandate dropped from. I'm not going to read out all these numbers, but I hope you get the idea. So the regional breakdown in the middle shows that the EMEA region and North America region were down moderately, but the U.K. was down considerably as a percentage -- sorry, the North American and EMEA was up slightly, but that was because the U.K. was down considerably as a result of the St. James's Place mandate loss. And then by product type, the revenue is shown again in blue bars. So just worth pointing out the BNP Paribas mutual funds, which remains our largest aggregate client, 25% of revenue coming from them. Just stable compared to 12 months earlier. Next slide. And the movement inflows or assets under management, this is in GBP 1 millions. But basically, if you divide by GBP 1,000, you get to GBP 1 billion. So St. James' Place, that's the GBP 6.2 billion outflow. Notable here on this slide is the middle top, which is the significantly reduced outflows from BNP Paribas. So that's encouraging and has continued to decline into the new financial year. And then segregated accounts on the bottom right is actually a Asia Pacific institutional investor that was paying us a very, very low fee and a performance fee. So we're not too disappointed to see that one go. Next slide. So moving on from the numbers to our strategic priorities, of which there are 6. So essentially, we're looking to scale the business in equities, fixed income and then grow private equity. That's the top line. And then the bottom line, build our sales and marketing, all our distribution channels, deepen our partnership with clients and then optimize our operating model. So a little bit more detail on these coming up. Next slide. So starting with listed equities. We are continuing to enhance our investment process, using technology and of course, AI, to which we're doing through a careful set of experiments. We have introduced more structure into our research team. And then in the product area, we are launching our first exchange-traded fund in the United States, which will happen in a couple of months' time, we are expanding our systematic equity product range and we've launched our new emerging markets fund. Next slide. In distribution, there's much more work being done to sell to clients directly in German-speaking Europe, which is DACH, Scandinavia, Benelux and France, and then we have a very good sales colleague in Canada. Through this channel in the Benelux area, we've won a very large segregated mandate, which landed in June. And meanwhile, our Sustainability Center is continuing to provide a differentiated service to clients. I'll come back to that in a moment. The -- in addition to the reduced outflows from BNP Paribas, we have been cultivating further partnerships for distribution in the Asia Pacific region, Latin America and Southern Europe. Meanwhile, our brand continues to resonate globally and as our competitors pull back, as I was saying at the start, then we're seeing an increasing opportunity not just for winning new [indiscernible], but also for winning mandates that clients are wanting to switch from some of these large branded houses that they no longer want to do business with. Next slide. So fixed income, as I mentioned, we completed the acquisition of SKY Harbor in April. We now have 23 investment team members, which is critical mass. That compares to 5 when we bought the Pax business. Client base is now spread nicely over both Europe and the U.S. with an established set of products around those 4 major strategies. We're making very good progress in adviser or consultant endorsements. These are essential for gatekeeping for the major asset owners and we're starting to extend our wealth management profile, not just in the U.S., which we've had for a number of years, but also now in many markets in Europe. So lots to look forward to in fixed income, and I think there's a good chance of a rapidly expanding set of inflows here. Next slide. And then in private equity, for those of you that don't know us in this area, we have been, since 2005, running a series of 10-year funds, we call them limited partnerships, and they are investing in the renewable energy space, particularly backing the developers of renewable energy assets all around Europe. These developers tend to be relatively small companies. They are relatively under-resourced in financial terms, and therefore, they're very happy and keen to do work with a sophisticated and well-capitalized or well-sized fund manager like Impax. So we are making very good progress with exiting our third fund and also deploying our fourth fund. So regulation around what you can say in this area around expansion, but I'll leave you to join the dots about what happens next. So we're making good progress in expanding this business. Meanwhile, the efficiency programs continue to develop because of the drop in assets under management, we've been able to reduce headcount from about [ 320 rolls to 275 ], so that's a drop roughly 15%. Frankly, that did actually reflect an inefficiency in our expansion 2019 to 2022 period when we were growing extremely quickly. And the way that we added roles at that time was probably not optimal. So many of these positions have been eliminated without any loss of capability. So crucially, we've been able to downsize the head count without any reduction in that capability or in our growth potential. And meanwhile, there's plenty of project work underway to improve our efficiency with the broader adoption of technology. That may well lead to further head count reduction in the future, again, without compromising our growth potential. And then as I said, the sustainability center, this essentially is helping our clients in 4 or 5 ways. So we are through the center, enhancing our research, we are coordinating our engagement and stewardship work with underlying companies. We're providing detailed reports to clients around nonfinancial outcomes, and we are helping them with thought leadership information, for example, around physical climate risk and at the same time, working on a collaborative basis with them around the engagement with policymakers so that there can be a financial expertise injection into new market creation and the associated regulations. At which point, I think I'm handing over to Karen. Karen Cockburn: Thank you, Ian, and thank you all for your time this afternoon. I'm just going to take you through those numbers that Ian's flashed in front of you there at the start. But it do reflect that Ian's comments that we find ourselves at the bottom of the cycle and numbers still a healthy profit but do reflect the level of outflow that we have seen this year. So starting with on Monday, we announced then the adjusted operating profit of GBP 33.6 million and the EPS sitting at 21.3. Now both of those numbers down by just over 1/3 from the prior year. And you can see that it's a net reduction of GBP 19 million, and that has come from a GBP 28 million reduction in revenue being offset then by the cost action that Ian referenced by about the savings that we made in year of GBP 9 million. Important, I think, we'll get into in a little more detail that as we did lose some of those larger clients, the actual fee margin, a key measure for the health of the business did improve. Now we finished the year in an operating margin of 23.7% and also finished the year with the balance sheet in very good health with capital and cash surplus. And on the back of that, proposing a dividend of 8p, 12p for the full year, representing a payout of 55.7%, and that's aligned to our dividend policy, a nice set our dividend payout, a sustainable rate. And then we finished a busy year also with a buyback, our first-ever buyback, which I'm happy to say is well on track for completion for the end of the calendar year. So the next slide looks at the revenue in a little more detail that sort of just unpacks that sort of reduction that we saw in the year, but it's predominantly driven by the reduction in the AUM. Based on Ian's slide, if you recall, that started the year at GBP 37 billion, but finished at GBP 26 billion. The average is for the two years are the ones that really drive sort of the revenue calculations and you can see that they have dropped reflecting that outflow. So just looking at the bridge, you can see the significant drop in the income year-on-year was this level of outflow and you can see SJP being the largest contributor to that. Now that was offset by favorable market movement and then the impact of the acquisitions as we build out our fixed income capability that took the full year to GBP 141.9 million. Now looking at asset management, it's usually important just to see where we are today. And there's a figure in the circle at the bottom of GBP 126.1 million. We call that the run rate, which is where we find ourselves and September times 12. Now what that figure reflects, it's important to sort of say the level of outflow that we had, 80% of it happened in the first half of the year. So the business has been in a very stable position of GBP 26 billion plus or minus a little for the last 6 months. And that's the position that we look for -- that we would like to retain before we push on for growth. In terms of looking at sort of where we think a number like that, I know you all have models and how that might outturn for the year. The guidance that we gave to the broad analyst community of which equity development takes part in our consensus is really very conservative that it's difficult to call when we expect sort of the growth to return, but we have many reasons to be optimistic as we talk there about the fixed income opportunity systematic and the ETF that we're very active in terms of new product. But I'm being very conservative in terms of where I see that coming in. So I expect the revenue to be a figure still beginning with a 1, maybe with a 3 at some point in the next 12 months. Now a really key component of looking at the AUM then is the average fee margin, which you saw increased to 46.9 in the year. Now that is the fee that's made up of over 80 clients and about 90% of that -- 95%, it comes from our listed equity business. And then about 10% of our business is this fixed income. So a combination of those as we grow forward, I expect to see sort of that run rate margin of 48.4 basis points come down slowly over time as we do grow that fixed income business. But that is a very healthy, well diversified supported by 80 clients margin and a sign, I think, of the underlying strength of the business. I then move on to look at costs on the back of that outflow that we had with a very active cost management program and the 45 people left the business. You can see in the bridge that the two orange blocks that we talk there are really staff related, so 45 people resulted in GBP 5.6 million saving in the year. On average, they left maybe 6, 7 months into the year. So that will gross up to over an GBP 11 million saving as we move into the new year. For those that follow us, a very important policy that we have is the level of variable staff cost. That's the bonus pool. We align that very closely to investor interest in that the policy is to pay out no more than 45% of the pre-bonus profits in the form of bonus. So what that means is that with that adjusted profit, the reduced profitability coming through, and it is the simple mathematics of that takes that into a saving, but the key point being very aligned. So a significant cost reduction in the business. And then we continue to invest -- whilst removing costs, we will continue to invest in the areas where we do see the opportunity for growth, and that's where you see the cost base build back up marginally, the acquisition of SKY Harbor bringing in additional cost and also then sort of just the regular inflation view. But where we finish the year is that whilst the cost across that bridge dropped by GBP 9 million, the two figures at the bottom of the table show you the actual run rate cost of the business reduced by GBP 20 million, so we have been able to respond to quite a significant amount of the AUM and flow loss that we've had. Just very quickly, looking down the left-hand side, you can see the head count there that has reduced, 45 heads came out. We did add some further into our fixed income business. We now have 23 investment professionals in our fixed income business. So that's a business ready to scale. And you can see the cost reductions just came broadly out of -- across the whole business rather than any one specific area. So our refined cost base is what we're taking into the new year and then bringing the revenue and the cost together just to look at that operating margin, 23.7. We have enjoyed a number of years previously in the 30s, and we feel confident about getting back into an operating margin of 30% in the medium term. So that's really finishing off on the P&L. Very quickly on the balance sheet, moving on to a couple of slides to say all in very good health. And with health finishing the year with GBP 64.7 million of cash on the balance sheet, significant healthy surplus in that. Key uses of the cash this year, it has reduced and broadly because of the relatively large prior year dividend being paid out of this year's reduced operating earnings. We -- and the acquisition of our own shares, which is the buyback. And also, we continue to buy shares into our EBT to further align our staff to shareholders. and of course, the purchase of SKY Harbor, which happened in April for $6 million roughly that comes out of that figure. So that leaves us with very healthy cash balances and on the back of that paying a dividend yield of 6.9%. Again, a very clearly defined policy that we've had for dividend over a number of years which is to pay out at least 55% of adjusted profit after tax. And this year, we're just -- we're putting this 55.7% to a sustainable rate. Now that level of dividend of 12p for the year plus the buyback, I'll talk about that in a moment. That's putting GBP 25 million, a significant amount of cash back in shareholders' hands over the period. Based on that dividend payout, looking on the next slide, at capital, again, remains with very healthy surplus. There's no debt in the business. We continue to generate capital. It shows we will -- it shows that actually the surplus there in that orange box looks as if it increased in the year. Once we complete the buyback, you'll see that reduce slightly. And then also an important message for me, just like costs where we're invested for growth. Our capital, we also have nearly GBP 17 million in seed capital, where we see growth opportunities. When we're doing this presentation, I think always important to talk about our capital allocation priorities. These have not changed since we updated at the half year when we restated our capital allocation policy. But the real priority right now in this period of volatile earnings is the financial resilience we will seek to pay the sustainable dividend. I mentioned we continue to purchase shares into the EBT. And then there always is the excess that we will carry looking for growth to invest into the business but also seeking to grow by small accretive acquisitions has always been part of the DNA of the organization, and that continues. And then just a page to finish with based on looking at the buyback. Just to confirm, we announced on the 22nd of May, a buyback of GBP 10 million. At the 30th of September, when the accounts, when you read them, you'll see that we had about 1/3 of that completed. We had a very active last couple of months and finish as of the day of the -- on Monday's date of announcement that we had 89% complete of the program. We, therefore, expect to complete that over the coming weeks. Net-net base, give or take a bit on where the share price is, we expect to be canceling up to 4% of the opening share capital on that. EBT. So just to sort of -- we've mentioned that, we continue to buy shares, spending GBP 3.4 million this year. And the EBT holds a significant portion, GBP 5.9 million of the issued share capital of the business. And then I just wanted to call out, we haven't looked at it for a while in these presentations, it's just that the broad shape of the share ownership with BNP being the largest asset holder and also being the largest shareholder of the business with 14%. That has been at that level for quite some time. And then we do seek and hence, why we continue with this EBT -- capital. We're seeking to have employees whether it be to own up to 12% of the issued share capital as well. Of course, we've got the founders in there and the free float. But that's always been a broadly stable set of shareholdings. With that, until our time for questions, I will hand it back to Ian. Thank you. Ian Simm: So just to wrap up on the outlook slide. So look, I think the investment management market is really an interesting juncture. The major asset owners around the world are increasingly looking for specialist investment management service in differentiated areas. So this is where Impax really stands out because for more than a quarter of a century, we've been focused on an area of the economy that is growing in a sort of secular way in the direction of more and more provision of cleaner less polluting goods and services. So there are some political bumps in the road around, for example, U.S. energy policy. But frankly, that's what asset management in the active area is all about. So we're able to navigate these political headwinds very successfully. So our differentiated brand does give a very easy calling card to the world's major asset owners, pension funds and sovereign wealth funds. And we've got a very wide base of such clients already. We also have offices in the U.S., a couple of offices in Asia and throughout Europe. So we're well placed to reach out to other potential clients in this space. The equity business relative to fixed income and private markets still dominates with 90% roughly of our value or our revenue coming from listed equities. And as I'm sure you appreciate, strategically, we are trying to diversify that by growing fixed income and private markets so that the business is less dependent on the equity market cycle. We haven't got that yet because it takes time to diversify. And therefore, we have been exposed in the last 3 or 4 years to that equity market cycle, which is similarly at the bottom, and we're waiting for a recovery. But in the meantime, the AI phenomenon is delaying that as more and more capital chasing the very large AI stocks. So I think the wide expectation in the market is that 2026 will be broader, there'll be less dominance by the major cap tech, AI names. And in that context, we ought to bounce back to outperformance. So the business development and diversification of business will continue. We're not signaling any more acquisitions at the moment, but that's certainly part of our medium-term plan. And in that context, as Karen laid out, we have a very strong balance sheet and ability to fund directly further acquisitions and a brand which asset management teams and boutiques, I think, increasingly find attractive as a potential home. So I will pause there, hand back to Andy. Andrew Edmond: Great. Thank you very much, both of you. Very thorough detail and a very clear presentation. Plenty of questions coming in, so let's go straight into them. Exuberance is a long way of describing the -- some of the flows money in recent years. And it certainly seems to be the case that some clients who put money with Impax have only had a short-term lived interest in sustainable investing. As you mentioned Ian, 27 years, this business has been going. Could you give more of a perspective about how long typical mandates might last on average in recent years or over that period. and give a bit more comfort on the stickiness of institutions who are genuinely interested in investing in this space? Ian Simm: Okay. That was quite a long question. So I think the easy way to address that is to say that there's two types of clients that we've seen recently, the long-term clients that have been with us for 5 to 25 years and then the more recently arrived clients. So I think the more recently arrived clients who've probably been less patient, and many of them came in with a very strong tailwind to the sector in the 2019 to 2021 period. And aggressively, that was pretty much the top of the market. So they're the ones who've experienced the most significant negative impact from the cycle. So as implied by the question, the longer-term clients generally are still with us at scale, as Tara mentioned, there's over 80 clients and that's 80 contracts. So some of those contracts will be with funds with multiple, in some cases, hundreds of underlying clients. What's the outlook for the business in terms of clients? Well, I think there's a very good chance that those longer-term clients will ride out the cycle because they've not lost as much money from -- because they didn't invest in the peak but also probably understand what we're doing better than the more recently arrived ones. But then as I said several times, we do have a great client outreach and client service team all around the world, so we're well placed to win additional business. Andrew Edmond: Very clear. Thank you. Right. You have consistently sought to grow fixed income and private markets to diversify the business. Does the Board have a longer-term target in mind for what might be a more balanced and ideal split between listed equities, fixed income and private markets? Ian Simm: Well, the Board doesn't have a formal target, and there's no statement as to what we're aiming to achieve. But I think if you look at other firms at a slightly bigger scale who do both fixed income and listed equities, then it's not uncommon to have two equally sized divisions. I think the uncertainty really is around private markets, which generally are more difficult to scale and where you need to be very careful about quality because if you don't deliver consistently good returns, then it's almost impossible to grow further. So we do enjoy the market insights and relationship connections for -- in the industry that our private markets team build or offering us, but we're not in a hurry to expand that area as rapidly as we think fixed income will expand. Andrew Edmond: Okay. Just on private markets, we have a question. Would you describe their activities as more VC than PE or the other way around? Ian Simm: Well, these terms tend to be a little bit slippery as I'm sure the questioner knows, the way we describe what we do is value-add infrastructure. So we are looking to get a capital gain by backing the developers of new assets and by putting money into -- from the construction of the new assets and then once the assets are built, we sell them. So that's why there's an infrastructure style, but it's value add in the sense of having a relatively short turnaround time and not owning the assets for yield, which would be a more sort of core or core plus based infrastructure strategy. Andrew Edmond: Okay. And whilst we're checking definitions, we have someone asking if you could just describe in a bit more detail what systematic equities products involve and who are the typical buyers for such products? Ian Simm: Sure. Yes. So one of Impax' strengths is the creation of taxonomies or universes of thematic stocks that fit the criteria, for example, in the water sector, we have a taxonomy of water stocks, water-related stocks or similarly in the food sector. So at the moment, our actively managed strategies, look at those universes and pick stocks through the judgment of the individual fund manager in a systematic equity strategy for, for example, water or food, the human intervention would simply be to check how the computer was doing in performing the same exercise, so computer and systematic would basically pick the stocks by running a very large number of portfolios of different weightings and different stocks and recommend the best one. So then the human intervention is simply to make sure that the output is consistent with the process. So less human intervention, lower tracking error or lower deviation from the benchmark and as a result, probably lower fees to the clients, but an ability to scale very considerably. Andrew Edmond: All very clear. Karen, I think this one might be for you. You mentioned that adjusted operating margins are hopefully going to move back to what have historically been much higher levels. It seems like most of the heavy lifting has been done in cost control. So can you just identify where your confidence is coming from on the other side of the equation is that operational leverage as assets grow? Or is it margins, if you can just elaborate? Karen Cockburn: Yes. So we have been very diligent, I think, this year in cost reduction and we sort of -- I want to say we have the cost base that we believe is the right cost base for the opportunity that's in front of us. So where would the confidence come from is where I'm being cautious. So that's why I say over the medium rather than the short term is the fixed income. They come -- they're large mandates that we've sort of -- we have in place our distribution network. So we have in place and that team of 23 investment professionals. We have a 10-year track record. So our investments have been made in that area that really should be scaled -- that will -- is our main opportunity for scaling. So I think the way I look at it is that we have really refined the cost reductions, what they did was really refined the listed equity cost base. So when that grows again, that will grow without much investment. But the real sort of step change will come from me in the fixed income growth. And the piece that I can't call is just the timing on that, but all the infrastructure is in place to enable that. Andrew Edmond: Yes, makes sense. Geographical question. North America or North American operations provided about 40% of your revenues. Could you give us an indication of the split between America and Canada in that number? And looking ahead, do you think that the sheer scale of the U.S. economy is the bigger opportunity? Or is it perhaps that Canada, which is certainly at the moment, more pro sustainability may prove the more interesting area to invest in? Ian Simm: Well, we've had some distribution in the United States since 2008. In fact, we brought our distribution partner, Pax World management in 2018. And we have, therefore, a very nicely positioned mutual fund platform serving the wealth management and to some degree, the retail market as well as an institutional client service group. In Canada, we have initially used BNP Paribas Asset Management but when they decided to pull out of Canada, we were able to pick up their representative who moved from BNP Paribas to Impax and is currently living in Montreal and doing the same job for us directly now. So we've had business in Canada for probably 15 years. In terms of the relative size of Canada, I think I know the answer, but Karen, do you have the exact number? Karen Cockburn: So I'm going to say North America in total is about GBP 10 billion of our asset. And I'd say somewhere mid-15%, probably Canada, 15% to 20%. Ian Simm: Yes. So that is heavily skewed to the wealth management market through distributors in Ontario and Quebec. A little bit of institutional, but it's mainly wealth. I do think there's very strong potential for that platform to grow because I think Canadian individuals and families are very well disposed towards and interested in the transition to a more sustainable economy. In the United States, I think, clearly, we need to be careful where we market. We do have a very well-established client base with the so-called wire houses, which will be the groups like JPMorgan, Morgan Stanley, Bank of America, Merrill Lynch and to some degree, Raymond James, Wells Fargo. And those represent very scalable relationships. There's also quite strong consultant following for -- amongst U.S. groups like Cambridge Associates who know our strategies very well, and there's a large number of institutional investors, particularly East Coast and West Coast who are still very interested in this area. So as a net or summary of all that, I would say that the North American opportunity is still very attractive in spite of the federal political headwinds and we do have a team of about 110 people in U.S. with one person in Canada who are building on our brand, which has been there since actually 1970s, which was the origins of taxable management. Andrew Edmond: Great. A couple of questions on the BNP channel, which I'll put together. Historically, Ian, I think you've explained that their outflows last year were mostly driven by top-down asset allocation at their end. And there is an additional -- there's a question, is that why it's stabilized in recent months? And an additional question, is it a question of the BNP sales force being more focused on your product and the two may well be linked. Ian Simm: I think that BNP Paribas Asset Management is well known throughout Europe as a money market funds and fixed income specialist with equity funds being a key component, but not as big or is a sort of high prominent, as prominent as those two other asset classes. So as you correctly pointed out, Andy, I've said before that in the last two or three years, BNP has been recommending to its wealth management clients, wealth management sector clients that they have a relatively conservative portfolio. So I think, yes, the fact that the outflows have been dropping does suggest that the central gatekeepers are incrementally more positive about equities and the salespeople are, therefore, proposing that allocation to equities are improved. So the other components in that story is the acquisition by BNP Paribas Investment Management of the counterpart in AXA, so AXA Investment management, which dramatically increases the size of the aggregated team. So we're looking forward to more distribution potential through a much larger platform. Andrew Edmond: Good to hear. And last question, I think, with some providers of asset management services, withdrawing from the sustainable investment area. Has that changed the identity of competitors that you come up against in tenders in recent months. Do they still tend to be firms with global reach, like yourselves? Or might there be local experts based in the region, be it Asia or America? Ian Simm: Well, if we cast our minds back 5 or 6 years or longer, then there was a group of specialist players with global reach who we would generally come up against. It's probably half a dozen names. And those groups are still around because like Impax, they are focused on not necessarily dedicated to you, but focused on this transition to a more sustainable economy. Around 2019, 2020, as I've mentioned, many of the very large asset managers in the world developed products in this area, and many of them, if not most of them, have actually bought back. So we're left with the same old group of experienced peers. But frankly, no one is as large as Impax in terms of resources. I think we are globally the largest manager dedicated to this area and probably the most diversified client base. So we are well placed to win mandates. And meanwhile, as I've said, the asset owner community is still very interested in what we're doing, albeit some of the pension funds, for example, in the southern part of the U.S. are fearful of coming into the space because of the political backlash. But if you strip that out, then the rest of the market is still very interested in what we're doing. Andrew Edmond: Great. Very good notes on which to finish the Q&A. Thank you to the audience for many questions. Thank you, of course, to our presenters. And Ian, perhaps would you just like to summarize the positive outlook? Ian Simm: Sure. Yes. Well, thanks for joining. Thank you to Equity Development for hosting. I think investment has to be a medium-term game. Otherwise, it becomes impossible to do other things in life. And I think Impax is fantastically positioned for medium-term success given our globally leading brand in an area which is set for further expansion. And the market is overdue a return to a more normal broader structure with less dominance by a handful of names. And in that context, our investment performance should be bouncing back fairly promptly. And when it does, then I think the flows can pick up very quickly. So we also have a good track record of acquisitions. We have a very strong culture management, as Karen says earning around 20% of the business, so very nicely aligned with external investors. So we really value the connection with everybody. Thank you to everybody who's dialed in and particularly those who've dialed in before and are following us. We're always available for one-on-one questions, if there's anything you'd like to address to us directly and look forward to staying in touch. Andrew Edmond: Thank you. Ian Simm: Thanks, Andy. Appreciate it.
Operator: Greetings. Welcome to the Dollar Tree Q3 2025 Earnings Conference Call [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Bob LaFleur, Senior VP of Investor Relations. Thank you. You may begin. Robert LaFleur: Good morning, and thank you for joining us to discuss Dollar Tree's Third Quarter Fiscal 2025 results. With me today are Dollar Tree's CEO, Mike Creedon; and CFO, Stewart Glendinning. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the Risk Factors, Business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10-K filed on March 26, 2025, our most recent press release and Form 8-K and other filings with the SEC. We caution against any reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all discussions today refer to our results from continuing operations and all comparisons discussed today for the third quarter of fiscal 2025 are against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Mike and Stewart will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to one question. I'd now like to turn the call over to Mike. Michael Creedon: Thanks, Bob. Good morning, everyone, and thank you for joining us to discuss our third quarter results. It's great to be with you again. When we recently gathered in New York for Investor Day, I said this was the start of a new era for Dollar Tree, one company, one brand, one focus. Our energy is now directed towards strengthening and growing the Dollar Tree business. We delivered a high-quality quarter, accompanied by mid-single-digit comps, above outlook earnings and strong end-of-quarter momentum heading into the holidays. These results speak to our disciplined execution and focused strategy. Let me start by framing the quarter at a high level, and then Stewart will take you through the financial details. First, I'd like to highlight the strength of our discretionary business, which showed its first positive year-over-year mix shift since Q1 of 2022. We believe this strength illustrates how our exceptional value proposition, including our growing multi-price assortment is resonating with our shoppers by helping them meet their needs and desires in the budget-constrained environment that many consumers find themselves today. The 3 pillars that define Dollar Tree are value, convenience and discovery. Those are not slogans. They're how we win. They describe a brand that offers customers compelling values across a variety of price points that help them do more with less in stores that are easy to shop and full of surprises worth discovering. While the consumer landscape remains uneven, the underlying story remains consistent. All consumers are seeking value. Marrying that value-seeking behavior with convenience and discovery is the intersection where Dollar Tree thrives. And the evidence is clear. Dollar Tree continues to gain share and attract new shoppers while continuing to serve its large and loyal base of core customers. Today, we serve an increasingly broad spectrum of shoppers from core value-focused households to middle and higher-income shoppers who are making deliberate choices about how and where they spend. We had 3 million more households shop with us in Q3 this year compared to Q3 last year. Approximately 60% of these incremental shoppers came from higher-income households, those earning over $100,000, 30% from middle-income households, those earning between $60,000 to $100,000 with the rest from lower-income households, those earning under $60,000. Importantly, Q3 spending growth was broad-based across all income sub cohorts, including households earning below $20,000. To us, this demonstrates that Dollar Tree isn't just for tough times or for those with limited resources. Dollar Tree is for smart shoppers across all income brackets where value, convenience and discovery matter. At the same time, higher income households are trading into Dollar Tree, lower-income households are depending on us more than ever. For example, the average spend for lower-income households grew more than twice as fast in the third quarter as the average spend for higher income households. While part of this reflects the fact that higher income households are typically earlier in their customer life cycle with us, the data clearly shows that our core customer remains loyal and deeply engaged. She's balancing her household budget carefully and continues to count on Dollar Tree for essentials and increasingly for the seasonal and discretionary items that bring joy to her and her family. Over time, our goal is to inspire the same level of loyalty in our newer higher income customers that we see in our core customers. While the average per household spend for our higher income customers is currently lower, even given their higher income, larger average basket size and ability to spend more, this is a simple function of trip frequency. Because many of our higher income customers are still early in their relationship with Dollar Tree, their purchase frequency has significant room to grow. Over time, we believe that growing trip frequency among these higher-income customers, given their propensity to build bigger baskets will be a powerful growth driver for Dollar Tree. This is why our brand promise matters so much right now. We make it easier for customers to do more with less without trading down on quality or experience. And that is what keeps our traffic and baskets healthy in a cautious consumer environment. And with that, let's take a look at some of our Q3 highlights. Comparable sales increased 4.2%, a nice acceleration from the quarter-to-date trend of 3.8% we shared in mid-October. As the results suggest, October finished strong, driven by momentum in our multi-price assortment and a great Halloween. Our Q3 comp was all ticket-driven as traffic was slightly negative. Discretionary mix improved 40 basis points to 50.5%. Comp increased 4.8% in discretionary and 3.5% in consumables. Gross margin performance exceeded expectations, reflecting strong operational execution and cost discipline. Adjusted EPS of $1.21 was nicely above our outlook, and Stewart will go through the drivers behind this upside in his remarks. We believe these results reflect our sharper focus and more disciplined execution. Multi-price was a key driver of our Q3 momentum. As a reminder, multi-price is a deliberate long-term data-driven strategy that began back in 2019 to make Dollar Tree more relevant, flexible and profitable. Multi-price is about evolving our assortment over time to include new, more relevant and attractively valued items that we could not offer at a fixed price point of $1 or $1.25. Multi-price is one of the most important strategic shifts in Dollar Tree's modern history, and it's working. As we highlighted at our Investor Day, the roughly 5.5% annual comp we've averaged since breaking the dollar in 2022 is among the very best in all of retail. Those of you who attended our Investor Day may recall a slide from Stewart's presentation, where he demonstrated how expanded multi-price penetration in categories like electronics, hardware and Easter had a meaningfully positive impact on sales and per unit profitability. We've reproduced a similar analysis on our multi-price Halloween assortment this year, which we've included in our supplemental presentation available on our Investor Relations website. Our Halloween performance this year is another clear example of the power of multi-price. This year, our Halloween assortment generated over $200 million in sales, an all-time record. But to see the full impact of multi-price, let's go back to Halloween 2022 when multi-price was still in its infancy. That year, multi-price represented about 3% of units sold, 10% of sales and 7% of merchandise gross margin across our full Halloween assortment. Fast forward to 2025 on a 25% larger base of sales, where multi-price accounted for roughly 1/4 of our total Halloween sales and merchandise gross margin, but only 8% of Halloween units sold. We are continually engineering incremental value and profitability drivers into our multi-price assortment. Across Halloween this year, each multi-price item that we sold generated 3.5x more profit than each non-multi-price item we sold. This is a full turn higher than Halloween 2022. By combining this increased per unit profitability with a higher multi-price mix, we were able to generate approximately 25% more margin dollars from our Halloween assortment this year compared to 2022, while selling approximately 10% fewer units. And this is just the positive impact on merchandise margin. It doesn't take into consideration any labor or distribution cost savings that come from handling fewer units. Looking at it this way, multi-price is a powerful growth and profitability driver. It broadens our value proposition and relevance to our customers, allows us to compete more effectively, helps drive cost leverage and sets the business up for long-term success. More importantly, we are just getting started. Multi-price is not a one-and-done proposition. We expect these dynamics to play out across every holiday and special occasion and strengthen as our multi-price penetration expands. Over time, our customers will let us know what the right multi-price mix ultimately is, but we're confident that it's meaningfully higher than where we are today. So let's take a look at some broader merchandising highlights from the quarter. Discretionary categories accelerated through the quarter with standout performances in party and home decor. Consumables were steady, led by household cleaning, personal care, snacks and cookies. Seasonal performance was strong, particularly towards the end of the quarter. We planned the inventory carefully, had strong in-store execution and are pleased with our sell-through. Those wins are proof points for our merchandising strategy and ever-changing more relevant assortment that drives trip completion and more importantly, enhances profitability and margin performance. Today, with a wider assortment of multi-price merchandise and restickering largely complete, 85% of the items in our store are still priced at $2 or below, offering a broad range of price points while staying firmly grounded in value preserves the integrity of the Dollar Tree brand. We believe time, convenience, pack size and quality are all part of our customers' value calculation and so is an expanded range of products that address a wide range of shopping occasions. When a customer can fill a basket with snacks, cleaning supplies, home decor items and seasonal products, all at a great value, that's when the Dollar Tree magic is on full display. Q3 results were also powered by strong execution in our stores, supply chain and support functions. At Investor Day, Jocy Konrad spoke about our commitment to simplify work, elevate standards and empower our people. In Q3, we saw measurable improvement in these key areas. On store standards, we've rolled out new tools and training that simplify store routines and improve accountability. The results are visible with cleaner aisles, stock shelves and faster checkouts with more to come. On associate engagement, our Race to G.O.L.D. initiative continues to gain traction. As we've increased our investment in training and career progression, we've seen continued improvement in turnover. In supply chain, the network is performing at a very high level. Service levels and in-stocks coming out of this year's peak season are among the highest we've seen and our planned increases in distribution capacity over the next several years should allow us to unlock even greater operating efficiencies and distribution cost savings. In technology, we continue to modernize our back-office systems and upgrades to our infrastructure. These investments are simplifying work and enabling smarter decision-making in merchandising and replenishment. All of this comes down to one thing, making it easier for our teams to deliver a consistently great experience for our customers. With the Family Dollar sale behind us, we are already seeing measurable improvements in our culture and performance. We are fully aligned behind one brand, one set of priorities and one mission with leadership and investment focus concentrated on growing Dollar Tree. Every decision across product, stores, technology, supply chain and people is aligned to strengthening one business. That alignment brings speed and accountability. Teams test, learn and scale faster, and we now measure progress across a single set of metrics directly tied to creating shareholder value. We are moving forward with purpose, clarity and conviction guided by the 5 strategic priorities we laid out at our Investor Day, surprise and delight our customer with an expanded, more relevant assortment, manage expenses with agility by controlling the cost of the goods we sell and managing our SG&A with discipline to drive operating leverage and profitability, create a strong connection with our customers with cost-effective, quick return, data-driven marketing, open more stores and improve the condition of our fleet; and finally, improve the in-store experience for our customers by raising the bar on our store standards. At the foundation of these priorities are a fast, flexible and efficient supply chain and disciplined financial management that focuses on high-return investments and smart capital allocation. And at the forefront of our success is our people, the more than 150,000 associates who show up every day to serve our customers, support their colleagues and strengthen the communities where we operate. They are the reason we do what we do and the driving force behind every decision we make. As you heard me emphasize at Investor Day, we manage this business with a focus on what I call the say-do ratio, making clear commitments and delivering on those commitments. This mindset builds trust and accountability across the organization, and we believe that maintaining alignment between what we say and what we do is how we deliver consistent performance over time. In summary, we are pleased with our Q3 results. We're building a stronger foundation for the future, and we're confident about the direction we're heading. With that, I'll turn it over to Stewart. Stewart Glendinning: Thanks, Mike, and good morning, everyone. Q3 comp sales increased 4.2% and adjusted EPS was $1.21. Both our comp performance and our adjusted EPS were ahead of the expectations we shared in mid-October. The 40 basis points of Q3 comp acceleration between the middle and end of October was driven by a late but strong performance in Halloween sales on the back of a deeper multi-price assortment and excellent execution across our stores. Dollar Tree's seasonal assortment and value resonated strongly with shoppers. Our EPS improvement versus expectations was largely driven by freight, higher discretionary sales mix and SG&A. With that, let's go over the details of our third quarter results. Q3 net sales increased 9.4% to $4.7 billion. Consistent with our expectations, Q3 comp growth was primarily ticket driven as traffic was slightly negative. Average ticket growth was supported by increased multi-price penetration, particularly across our Halloween assortment and the pricing actions we began rolling out last quarter. Importantly, strong execution around merchandise cost, tariff mitigation, freight and operating expenses helped drive profitability. Q3 gross margin expanded 40 basis points to 35.8%. These results reflect the strength of our assortment and the agility of our merchandising, supply chain and store operations teams. The key drivers of this improvement were merchandise margin, successful execution of our 5 merchant levers: renegotiation, reengineering, shifting country of origin, discontinuing and targeted price changes, all contributed to our ability to manage increased costs from tariffs. Freight, import and inbound freight rates were favorable versus prior year with lower spot market utilization and better container flow-through at our DCs. Domestic transportation costs were also favorable. Mix, discretionary and seasonal categories, particularly Halloween, were stronger than expected, increasing the realized mark-on -- markdowns. As part of the ongoing strategic initiative to increase shelf productivity that we outlined at Investor Day, we identified and wrote off various slow-turning SKUs. This will create room for more productive items and help optimize storage space utilization in our stores and DCs. The total impact to Q3 earnings was approximately $56 million or approximately $0.21 of EPS. We believe we will see increased sales and profits per store going forward as we bring in new items or reallocate shelf space to existing but faster-turning products. Shrink. Overall, shrink was higher than last year, but in line with our expectations. These drivers taken together drove the Q3 gross margin performance. At the Dollar Tree segment level, our Q3 adjusted SG&A rate increased 160 basis points to 26.2%, driven by higher store payroll related to wage increases and restickering, general liability claims costs and D&A from elevated store investments. These were partially offset by sales leverage. As a reminder, we do not expect costs related to restickering and other price-related activities to be repeated next year. Also, the wage-related payroll increases this year were expected and planned. Looking forward to next year, we expect wage growth to moderate. As we discussed at Investor Day, on a go-forward basis, our goal is to grow Dollar Tree segment SG&A per store below the rate of inflation while reinvesting selectively in high-return initiatives that enhance the customer experience and the long-term profitability of our store base. We believe this will result in future SG&A cost leverage. Adjusted corporate SG&A should be considered net of TSA income because of the costs we carry in order to service the Family Dollar transition. Using this lens, our adjusted corporate SG&A rate, net of the $24 million of TSA income leveraged 80 basis points to 2.4%, a positive step toward our goal of reducing corporate SG&A to 2% of sales by fiscal 2028. Adjusted operating income increased 4.1% to $345 million. Our operating margin contracted by 30 basis points to 7.3%, reflecting the offset between the gross margin expansion and SG&A deleveraging, partially driven by cost headwinds such as restickering that will not repeat in 2026. Keep in mind our comments with respect to anticipated SG&A leverage next year at both the Dollar Tree segment and the corporate level. Net interest expense and our adjusted tax rate were broadly in line with expectations. Adjusted EPS from continuing operations increased 12% to $1.21. Moving on to the balance sheet and free cash flow. Inventory was down $143 million or 5% versus prior year, while sales increased by 9.4%, our store count increased by 4.5%, and we ramped up our DCs in Ocala and Odessa. This reduction reflects our focused efforts to increase inventory turns and improve shelf productivity. We ended the quarter with $620 million of commercial paper notes outstanding and $595 million in cash and cash equivalents. On the Q3 cash flow statement, we generated $319 million in cash from operating activities and had capital expenditures of $376 million. This resulted in negative free cash flow in the quarter of $57 million. Year-to-date, we've generated $88 million of free cash flow. As a reminder, the fourth quarter is our highest cash-generating quarter because of normally higher levels of sales and because our capital expenditures skew towards the first 3 quarters of the year. In Q3, we purchased 4.1 million shares for $399 million, including excise tax. Subsequent to quarter end, we repurchased an additional 1.7 million shares for $176 million. Year-to-date, we've completed $1.5 billion of share repurchases or approximately 16.7 million shares at an average price of $90 per share. This represents approximately 8% of the shares we had outstanding at the beginning of the year. Our liquidity remains healthy. Our balance sheet remains flexible, and we have ample capacity to fund our growth and return significant capital to shareholders. Our capital allocation priorities remain unchanged: number one, invest in growth; number two, maintain a strong and flexible balance sheet; and number three, return capital to shareholders. Looking ahead, we expect Q4 comps will come in between 4% and 6%, which should support net sales of $5.4 billion to $5.5 billion and adjusted EPS in the range of $2.40 to $2.60. On a full year basis, this would raise our comp outlook to between 5% and 5.5% and our adjusted EPS outlook to $5.60 to $5.80. The underlying assumptions incorporated into our full year outlook are as follows: net sales of approximately $19.35 billion to $19.45 billion. Gross margin expansion of approximately 50 to 60 basis points, reflecting sustained favorability in merchandise margin, freight and occupancy leverage with some offset from markdown and shrink. Dollar Tree segment SG&A deleverage of approximately 120 basis points, primarily driven by higher store payroll related to wage increases and restickering and to a lesser extent, facilities costs and D&A. Corporate SG&A costs. We expect corporate SG&A net of $55 million of TSA income to decrease by approximately 3% year-over-year. Net interest expense of approximately $85 million to $90 million, which is about $10 million to $15 million below our prior outlook, an effective tax rate of approximately 25%. Shares outstanding of approximately $206.4 million, reflecting our share repurchase activity through December 2. We remain on track to meet our full year CapEx target of $1.2 billion to $1.3 billion. We understand that at this point, many of you are shifting your attention to next year. As is customary, we intend to give a detailed outlook for 2026 on our next earnings call in March. With that said, I will remind you of the directional outlook we provided at our Investor Day, where we outlined an algorithm for adjusted EPS to grow at a 12% to 15% CAGR through 2028, supported by underlying EPS growth of 8% to 10%, with the balance being driven by the unwind of certain discrete items, mostly affecting 2026 with some residual carryover into 2027. To review the underlying details of the algorithm, I direct you to our Investor Day presentation, which is archived on our IR site, and we will give you more specifics in any updates next quarter. To wrap up, we're executing well against the road map we shared with you in mid-October. Each day, we continue to see tangible proof that the fundamental appeal of this business, value, convenience and discovery is resonating with customers and translating into strong financial results. With that, I'll turn things back over to Mike. Mike? Michael Creedon: Thanks, Stewart. Let me wrap up by putting Q3 in the broader context of where we are and where we're going. When we shared our road map at Investor Day, we said this transformation was about focus, consistency and accountability. We believe Q3 was a strong proof point that our strategy is working. We delivered above-market comps, expanded gross margin and continued to make meaningful cultural progress across the organization. Today, Dollar Tree is a pure-play value retailer with the scale and focus to compete at the highest level. Post Family Dollar, we have clarity of purpose and our teams are responding with renewed intensity. As we look to Q4, the setup is solid. Halloween was great, and our Thanksgiving and Christmas assortments are resonating with our customers as we remain focused on consistently delivering unbeatable wow value and the thrill of the hunt experience. As 2025 winds down, let me wrap up by saying, first, to our associates, thank you. Your dedication, creativity and pride in the work you do are what makes Dollar Tree special. To our customers, thank you for your trust and loyalty for choosing us for the moments big and small that matter the most in your daily lives. And to our shareholders, thank you for your continued confidence and partnership. With that, Stewart and I are happy to take your questions. . Operator: [Operator Instructions] Our first question comes from the line of Matthew Boss with JPMorgan. Matthew Boss: Congrats on another nice quarter. So maybe 2 parts. Mike, could you elaborate on drivers of the same-store sales acceleration that you saw in October, speak to comp trends that you've seen in November that support the 4% to 6% fourth quarter comp guide? And then, Stewart, could you just help break down gross margin expansion opportunities in the fourth quarter and how best to think about gross margin puts and takes maybe at a high level for next year? Michael Creedon: Yes. Sure, Matt. As we looked at how the quarter unfolded, the Halloween was just a great finish to the quarter. It did come as we see in times like this, people buying for need and a little closer to need. So it came a little later, but it came incredibly powerfully, and it came with a record number. If you go back, Easter performed that way, a great Easter, a great Halloween. And our setup for Thanksgiving and Christmas is just fantastic. So we really look at what we've done with multi-price and how the assortment has gotten better and our customer across all incomes is really resonating with that and providing just fantastic seasons for us. So we feel really good about our guide on the 4% to 6%. Stewart Glendinning: Matt, let me pick up on the gross margin for the fourth quarter and then just talk a little bit about next year. So first of all, as we think about the fourth quarter, the same kind of levers that you saw in the third quarter, we detailed some of that in our supplementary materials as well as in my prepared remarks are going to be drivers in the fourth quarter. You will see a very powerful fourth quarter on the back of those drivers. If you look to next year and just think about next year, freight is a benefit certainly in the fourth quarter, it came through in the third quarter. As you look to next year, both freight and markdowns are the areas that we'll be watching. If you think about how we operate our business, we buy to a margin. And so when we set up our goal for next year, we shared with you that we said we would be equivalent to this year's margin, plus or minus 50 basis points, and that's the place that we're targeting. There may be continued benefit in freight as we move into next year. There is some belief that perhaps on the freight side, we'll see a tightening of capacity later in the year, and we are watching the potential shortage of drivers. But I understand that the reason I bring up the targeted gross margin is because we use those 5 merchant levers to achieve that margin. So I think the margin you can take to the bank for next year. The second piece is to refer back to the Investor Day materials that we had. And in our fourth -- in our recent Investor Day, we shared with you an algorithm that said we would achieve high teens improvement next year. That's on the basis of that same gross margin achievement and based on some of the discrete items that we're expecting to see in the coming years. So we're set up well for next year, and I think that probably gives you the main drivers. Operator: Our next question comes from the line of Michael Lasser with UBS. Michael Lasser: It's on traffic. And obviously, this was the first decline in traffic that Dollar Tree has experienced in a while. To what degree is that as a result of some of the legacy households pushing back on the price increases that have been taken in the last couple of quarters? And if that's the case, does that give you any pause on your ability to achieve this high teens EPS growth next year in light of the prospect that you might have to make some investments in order to recapture those households that are just dissatisfied with the pricing changes? Michael Creedon: Yes, Michael, we really see traffic as a mix between some internal activity, namely the restickering and some broader retail trends. We don't see it as a pushback from our customer. And if you look at our performance in the quarter, we had great growth across all income cohorts, and our core customer really had our highest comp. So we look at it and say we saw the traffic decelerate in that August, September time frame. That was the peak of our restickering. Those red stickers that was the peak distraction for us and then it was good to see traffic strengthen towards the end of the quarter, really on the backs of that Halloween and that great strength in Halloween. So we believe there was some broad-based retail traffic decel around back-to-school, some of the sticker shock around back-to-school. But as we got into the real core of what Dollar Tree does and does, we think, better than anyone, we saw the strength in our Halloween, and we're very excited about what Thanksgiving and Christmas and all the seasons can do for us. Operator: Our next question comes from the line of John Heinbockel with Guggenheim Partners. John Heinbockel: Mike, 2 quick ones. When you think about traffic or divergence between traffic and units, so sort of is the idea, traffic will be strong, units maybe to a lesser degree because you're basically trading people into higher price point items. Talk about that divergence in your mind. And then secondly, if the units are going to grow at a slower pace, how do you think about space allocation and replanogramming the stores over maybe the intermediate to longer term? Michael Creedon: First of all, thanks. We'll always follow our customer on that. We believe that the customer is resonating incredibly well with multi-price. We're hearing that in the surveys we're doing. We're seeing it in how our customers are performing in the store and that real strength in the comp of that core customer. So yes, when we look at the store, when we take multi-price, we'll take away sections of $1.25. And so your units will naturally decline there as you take that space and make that space more productive. So we do see some of that. But we believe the proof point we have from break the dollar was that you took up the price of the whole store. There were elements of the store that just didn't work, and our merchant team took the next buying cycles to really recover that. What we've seen here in this multi-price evolution and some of the restickering we did based on the inflationary cost environment is that the units have performed better, the traffic has performed better, and we're confident that we can continue to drive that value in our product across these price points and continue to give the customer exactly what they need. So we see that coming together very well for us, and we'll respond to the customer and their trends with how we set up the store. Operator: Our next question comes from the line of Edward Kelly with Wells Fargo. Edward Kelly: I wanted to ask you about the mix of multi-price as you think about next year. Just looking out, it does seem like you'll have more conversions. I would imagine you're still doing more merchandising around improving the multi-price mix. So how do you think the stores look from the standpoint of the multi-price offering as we think about next year? And then how does that play into the way that you are thinking about driving comp next year in terms of traffic versus ticket? Michael Creedon: Yes. Thanks, Ed. I mean I really want to start with saying 85% of the store is still $2 or less. So we're still early in this multi-price game. And when you look at what the seasons have done, we're going to continue to benefit in those seasons from the multi-price assortment. And we're really looking at everyday essentials and where we can benefit in the assortment there and the shift towards multi-price. Where it ultimately goes, our customers will respond to us and we'll respond to them in terms of building it out. But I know it's higher than where we are today, and it's something that we believe sets up a multiyear run where we're able to respond to our customers, wow them with new discovery and not just at the seasons, but new discovery every day because multi-price contains something on a wow table for us or on an end cap that shows them something they couldn't believe they could get at that price, even though it's a price higher than $2. So we're delivering the everyday value with the majority of the stores still at that $2 or less, and we're wowing the customer in what we bring into the multi-price assortment. Operator: Our next question comes from the line of Paul Lejuez with Citi. Paul Lejuez: Curious if you could talk about Thanksgiving weekend and what you saw from a traffic versus ticket perspective. It sounded like you saw a pickup in traffic around the Halloween period. Curious what you saw Thanksgiving week and weekend. And then that 85% number, I think you're talking in terms of units, in terms of the percent of the store that's still $2 and below. What percent of sales would we -- should we think about being above that $2 level? And how does it split between discretionary and consumables? Michael Creedon: Yes, Paul, let me clear up the first one. So first of all, it's sales dollars that are at the 85% of the stores $2 left. That is on sales dollars. As we look at how the quarter has started, I said in my prepared remarks, we're really pleased. We look at the strength of the seasons, the Thanksgiving, the setup for Christmas, what we've seen so far in Christmas. So we feel really good about the guide for the fourth quarter. We've got one period in, and we're feeling really good about where we sit. Operator: Our next question comes from the line of Rupesh Parikh with Oppenheimer. Rupesh Parikh: I also have a 2-part one. So just on the elasticity front, just curious on the categories you took pricing related tariff trip and price increases. Just curious how that played out. And then if we do get tariff relief, how do you guys approach that, whether passing on those savings or letting it flow to the bottom line? Michael Creedon: Yes. Thanks, Rupesh. I mean the elasticity has really -- it's come in as we've modeled it. It's very manageable. It's really offset by the mix we see in the multi-price. But most importantly, the value perception is intact. Our customers responding across all income cohorts, core customers, new customers, the 60% of the new $3 million that have come in, making more than $100,000. So we believe that the elasticity is very manageable. And then I do think it's important to go back to that break the dollar moment, what we saw there, it's a proof point. You can go back and look, see what happened with traffic. And now our performance, we believe, and what we're seeing in our numbers is better than that and gives us the confidence in the path we're on, on this. As for the tariffs, I know it's been a lot in the news. We have, I think, one of the very best global sourcing teams in the business. They are all over this. They've got great partners watching this. We'll see how it unfolds with the Supreme Court, and we'll take action from there. Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Uriel Zachary Abraham: This is Zach on for Simeon. Just a couple from our end. Back to the traffic question, is there a way you could compare your frequent and most loyal customers to those who are more episodic? And would you say there's a similar deceleration in traffic trends between both of those groups? Or is there a gap in the trend? Michael Creedon: Yes. When we break it down, we really look at more our sales across all those income cohorts. It's really important to us to make sure that as we know multi-price skews and attracts more towards higher income that we are committed to the base of our business, which is that core customer, that customer that makes around $60,000 a year. And we were particularly pleased with how our comps performed at that core customer. They had our highest comps in that customer. And so we think that our customer, whether you're new to Dollar Tree or you shop us several times a month, that you're finding what you need as you seek -- if you seek out affordability, you're finding exactly what you need at Dollar Tree. Operator: Our next question comes from the line of Scot Ciccarelli with Truist. Scot Ciccarelli: Scott Ciccarelli. I think we all understand that there was some internal disruption as you resticker product. But with the negative traffic this quarter and the expectation to keep expanding MPP, should we just expect 4Q and next year to have a similar mix of traffic and ticket that we saw in 3Q? In other words, it's all the comp is primarily driven by ticket. Michael Creedon: Yes. Scott, it's hard to say. We can go back and we know what we saw and break the dollar. You saw the multiple quarters and how the traffic performed there. We believe this time around, we were much more strategic. I mean back then, the only choice was raising everything to $1.25. And as I've mentioned, you had a healthy percentage of the store that just didn't work at that new level and the merchant team had to go over several buying cycles and reengineer product and renegotiate and get product that did work, and you saw what happened with traffic recovery. This time, we were much more strategic in how we took that. We really feel that we have found the right value places to take price. And our customers responded. If you look at the value we took in Halloween or in Christmas, I mean, our customers responded incredibly well to that move. So I look at it and say, I think we were more strategic this time or we at least had a more strategic opportunity available to us this time, and we'll see how the traffic plays out. Stewart Glendinning: Yes. And maybe one other thing, just to supplement, I think if you go back to the investor materials we laid out, I mean, that entire strategy is set up to drive higher sales in stores via productivity on the shelves, via the way we intend to market to customers and based on the way we intend to run better stores. I think that entire setup really is organized to enhance the traffic and the ticket flow. Operator: Our next question comes from the line of Michael Montani with Evercore. Michael Montani: I was going to ask if you could share what the average selling price was in 3Q versus this time a year ago. And then curious if you think that you'd be able to get that level of price increase again in 2026 to drive comp. Michael Creedon: Yes. Our AUR right now right about $1.50. When you look at that value over time, it's pretty remarkable considering what this company has done, what other prices have done. So we look at it and say, our customer is going to tell us with their comps, with their wallets that we're hitting the right points in terms of value, convenience and discovery. One of the things that we really turn to is that expanded more relevant assortment. So yes, it comes at a higher ticket, but it's still an incredible wow for the customer. It fits their occasion, the purpose for their trip and whether it's a great pack size for them that helps them or just an item that helps them celebrate and they love it. So we feel that while the AUR moves up, it does so lock squarely into that value play for the customer. Stewart Glendinning: Keep in mind one other item is that, obviously, as our multi-price penetration increases, so that will also move AUR, that is not price dependent. And I think if you look at the supplementary materials and you look at how well the multi-price worked in Halloween this year, it will give you a sense for the kind of benefit we might see going forward as we drive that multi-price harder. Operator: Our next question comes from the line of Zhihan Ma with Bernstein. Zhihan Ma: Just one quick clarification on corporate expenses. Did it come in a bit better than your prior expectations? If you can provide a bit more color there, that would be really helpful. And then a quick one on next year. Given the trade-in you have seen from middle to higher income consumers, what does the tax refund, the incremental tax refund next year do to middle to high-income consumers shopping behaviors in your mind? Stewart Glendinning: Yes, I'll pick up on the first part, Stewart here. The SG&A did come in better than we expected as we get ready to set ourselves up for next year and achieve some of the aggressive savings targets we've set up, we've been squeezing down on SG&A. Some of those savings came in a little bit faster than we had expected. Michael Creedon: Yes. And then I'll take the second one. I look at the tax refunds of the OB3, Big Beautiful Bill. Would you offer the best value in retail, you benefit when people have more money in their wallet. And Dollar Tree has the best value retail has, and we think we'll benefit as they get more money in their pocket. Operator: Our next question comes from the line of Kelly Bania with BMO Capital Markets. Kelly Bania: I wanted to ask about the consumables, the market share trends there from a unit perspective. They seemed quite strong in the first half, but really shifted in the third quarter here. I was just curious if you had any explanation of what you think is happening there? Is that attributable to the sticker -- the restickering impact? Or any other color on the market share trends there? Michael Creedon: Yes, Kelly, the red dots is kind of how I'll answer that. It really peaked for us in this Q3. It was the mass distraction. I will tell you, though, as we've seen trends from our customer post that, we track via customer surveys, via scrapes of website and star ratings and all that, the sentiment of our customer that really peaked negative in that August, September has improved every week. So the fewer mentions of pricing, more positivity, less negativity, we've been watching that. And every week, that's gotten better. So we don't love that we had to create that environment for our customer. It was a necessary evil to continue to deliver for them and give them product at a value. But it is what it is, and it's behind us now. The red stickering is basically done. You get a little bit as you take some pack away, but it's basically done. The distraction is behind us and our stores and customers are responding very favorably. Operator: Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Joseph Feldman: When you talked about the -- that higher income consumer trying to get them to visit more often with more frequency. I'm just wondering how you guys plan to go about that? Maybe is it more stimulus from a marketing standpoint? Or I don't know what other methods that you might be thinking of, but how do you get them to come more frequently? Michael Creedon: Yes. We love that this customer is finding us. We want to create a very sticky relationship with them. And we believe it is the more relevant assortment. So continuing to wow them each season that they come up and for their everyday essentials with items they just can't believe they found. Remember, you don't come into Dollar Tree with a list and you head down and I have to get this. You come in with your head moving around, looking at all the things that are wowing you. So that relevant assortment creates a sticky relationship, and then there is nothing more important than running better stores. Our store standards are on the move up, and we believe that as we continue to improve the in-store experience, those customers are going to want to come more and more often. Operator: Our next question comes from the line of Robby Ohmes with Bank of America. Robert Ohmes: I wanted to follow up on the last question. Just the -- it's impressive how you guys are gaining all the new customers and the info you gave us on that. Just help me understand gaining all these new customers at all these income cohorts versus negative traffic. Like how does that happen? Is somebody -- are there cohorts dropping out or coming a lot less frequently and that's offsetting all these new customers that you guys have gotten to come to the stores? Maybe a little more color on like what's happening there. Michael Creedon: Yes, Robby, it's really a question of frequency. So you're driving new customers to the store, which is fantastic. I mean, 3 million new households. Yes, they're skewing a bit higher income, but the strength of our business is still in that core customer, their purchase frequency, their comp dollars. We believe that these new customers come in, we can increase their trip frequency, too when they find better run stores and they find an assortment that keeps them coming back. So right now, they're coming in because of a Halloween or they're coming in for a great season and then what they find in the store when they're there in health and beauty and in everyday essentials, that's what keeps them coming back. If you look at Dollar Tree compared to some of the folks we aspire to be, the difference is not in our ticket. The difference is in trip frequency. We believe we've got an opportunity to unlock increased trip frequency with these great newer trade-in customers. Operator: Our next question comes from the line of Bobby Griffin with Raymond James. Robert Griffin: Just curious if you can expand a little bit more on shrink and where you are in that journey of bending that line item. And then I don't think it was discussed at the Investor Day, but what is embedded in the multiyear outlook for shrink? Is that elevated rate versus pre-COVID? Or is it a return to 2019 rates? Michael Creedon: Yes. I'll start with that with the focus we have. We learned a lot about shrink from Family Dollar. Family Dollar has a higher shrink threshold, if you will. And we were able to bend the curve over there. And so we've really reorganized how we're addressing shrink at Dollar Tree. It's not as simple for us as it is other. We can't just go rip out a bunch of self-checkouts and improve our shrink. We don't have self-checkout in any large capacity. So for us, it has to be leveraging training of our people, leveraging technology to address shrink over time. And then in terms of how it builds, Stewart? Stewart Glendinning: So Bobby, Stewart, we have built in some improvement in shrink as we move forward. I mean we've made these changes to people and process. We're investing money in our -- in our asset protection, and we expect that to bend the trend. So that is built into the forward expectations. Operator: Our next question comes from the line of Chuck Grom with Gordon Haskett. Charles Grom: I have just a question on the SG&A line. In Slide 9, you talk about the unit trend going from 100 to 89. So there's a clear benefit from running less units through the store on freight and handling expenses. But when we look at the core SG&A line, can we unpack the 160 basis point increase in SG&A? And then also looking ahead to the fourth quarter, how are you thinking about the complexion of both gross margins and SG&A in the last quarter of the year? Stewart Glendinning: Yes. So Chuck, Stewart. When you really look at SG&A in total, the big driver for SG&A increases is really in store payroll in that whole space. We do have some increases, as we said before, both in D&A based on store investments and also in general liability claims. Those are probably the big areas to think about. If I unpack the store payroll for you a little bit, earlier in the year, we commented on the fact that first, we were faced with some rate increases. Those -- a number of those were driven by state minimum wage increases. And second, we had decided at the beginning of this year that we would put some more hours back into the stores because we felt that if we invested some hours in stores, we could drive a better comp. And certainly, we set that out as an aggressive goal for the year, 3% to 5% comp, and we're obviously at the top end of that. And the last piece, of course, is the tariff-related stickering activities, which is a pretty substantial add. So if you think about the increase in payroll, which, again, the biggest driver of the SG&A, it was about 1/3, 1/3, 1/3. 1/3 was the rate, 1/3 was the increased investment in hours and 1/3 was stickering. Let me come back now to your unit point because I want to look forward to next year. If you're thinking about next year, the stickering is sort of largely gone. So that piece is not going to be pushing on our P&L. In fact, that's a benefit. The rate increases, we believe that rate is going to start to moderate, and that's going to help us next year. And then the last piece on the hours side, actually on the hours side is exactly the point you've just made. The success of multi-price, in fact, allows us to move fewer units through the store, and that will give us the flexibility to decide do we take the units -- do we take the hours down? Do we invest some more hours in running the stores better? But I think it puts us in a better position overall. Hopefully, that gives you a good flavor for your question. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mike Creedon for any closing comments. Michael Creedon: Thanks for joining us today, and we wish everyone a safe and healthy holiday season. Thanks so much. Operator: Ladies and gentlemen, thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.